Changes in the Price/Earnings Ratio of Stocks

A chart posted at the Chart of the Day website on October 14, 2011, illustrates changes between 1900 and October 2011 in the valuation of the stock market as measured by the price to earnings ratio (PE ratio). From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings spiked to extraordinary levels during the financial crisis of the late 2000s. As a result of increases in corporate earnings since the financial crisis of 2008 as well as relatively lower stock prices the PE ratio has dropped to a level not seen since 1990.

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