Stock Market Supercycles
We are by no means original in this regard, but Stock Market Beat ascribes to the notion of cyclical P/E supercycles. The premise is that over very long time periods (15 or more years) the stock market tends to be in a trend of rising P/E ratios or falling P/E ratios. Right now we are in the falling cycle and are likely to be for several more years.
This does not mean that stocks cannot rise in value during these cycles. The P/E is composed of price and earnings. So if earnings rise faster than the multiple falls, prices can go up. Over long time horizons corporate earnings have grown at a remarkably steady rate of about 6.5 per cent annually. During times of rising multiples, stock prices grow at a rate faster than 6.5 per cent and during contraction cycles they tend to grow at a slower rate.
John Mauldin has a very good discussion of the topic here.
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