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Using the P/E ratio as an equity valuation tool, is now a good time to buy...

Using the P/E ratio as an equity valuation tool, is now a good time to buy stocks? Why or why not?

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Answer #1

P/E ratio as an equity valuation tool is mean-reverting tool. This means that P/E ratio reverts to its mean in the long term. Therefore, stocks should be bought when P/E ratio is below its historical long-term average, and stocks should be sold when P/E ratio is above its historical long-term average.

We look at the historical long-term P/E ratio of the S&P 500 (since 1926) below :

From the chart, it can be seen that the current P/E ratio of the S&P 500 is not at its historical long-term average, but much above its historical long-term average.

Therefore, it is not a good time to buy stocks.

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