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Just because stocks are expensive doesn’t mean investors should immediately cash out and prepare for imminent price declines. Why? Because elevated P/E levels are not that reliable in predicting potential market performance. Here’s the proof.
The above comments, and those below, have been edited by munKNEE.com (Your Key to Making Money!) for the sake of clarity [] and brevity (…) to provide a fast and easy read and have been excerpted from an article* by Sam Ro (BusinessInsider.com) originally entitled A pricey valuation is not a sign that stocks are doomed to tank and which can be read in its unabridged format HERE.
According to BMO Capital Markets’ Brian Belski “P/E has a poor track record for predicting shorter-term returns” and, in fact, as illustrated by the chart below, aren’t that reliable over any given period and “therefore, we believe investors are likely overstating the importance of elevated P/E levels as it relates to potential market performance in the coming months.”
BMO Capital Markets
Concludes Belski, “Although we do not discount the possibility of periods of market weakness – especially given the stage of the current cycle –nothing in our work suggests an imminent end to the current bull market.”
*http://www.businessinsider.com/r2-of-sp-500-pe-and-returns-2015-3
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