Chart of the Week: P/E Ratio: Cyclical Expansion and Contraction

We have addressed the cycle of P/E expansion and contraction many time in the past. Today, we bring you a related study from Bob Bronson’s Capital Markets Research.

Stock market P/E ratios are a mean-reverting phenomenon. Over the past 135 years, stock market P/E ratios have explained about 50% of stock returns over the subsequent decade. During the three periods starting on 1/19/1906, 11/28/1929 and 5/14/1965, market P/E ratios declined between 65% and 75% over the next 14 to 20 years. During the three Bull periods (8/24/21, 6/13/49 and 8/12/82), the stock market’s P/E ratio rose between three- and five-fold.
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P/E Ratio: Cyclical Expansion and Contraction

Pe_ratio_highlow_volatility_channel_2

Source:  Bronson Capital Markets Research
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We may be in the same cycle where P/Es are contracting. Market Analysts like Bob Bronson expect the next cycle to start with a market P/E ratio below 10, sometime near Oct 2014.

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