And with a P/E ratio of 95, versus 25 and 59 for Google and Amazon, respectively!
Bankers put together detailed models to estimate the earnings per share in the future. Yes they are estimates, but informed as best as possible.
The model spits out an estimated $/share. If the current price is lower, they think the future value of the share is actually higher than the current price, so they buy or convince others to buy.
That isn't the financial datum that really matters, though - what matters for P/E ratios is the risk free rate (which establishes the discount rate for the time value of money), which is still very high.
Where's the research showing the empirical relationship between P/E ratios and the risk free rate?
Also, we are living in a a time of unprecedented monetary aggregate growth (for the US at least). I posit his why the yield curve has been inverted for so long and yet there is no recession in sight. The predictive power of asset prices seemingly no longer exists.
https://www.currentmarketvaluation.com/posts/sp500pe-vs-inte...
It's also just common sense if you understand company valuation.
In 2000 the SP500 PE was 40, and fed funds was 6%. it's low 20s now, and fed funds is 5.25%
studies over more recent times have shown this correlation break down. It's probably the reason Ray Dalio retired.
I mean realistically the US will just print the money it needs to pay that interest.
It’s not a consequence-free decision for them, but much better than defaulting.
You know whose M2 has also been rising for decades? Japan's. And yet for most of that time the Nikkei has been flat (even negative):
* https://fred.stlouisfed.org/graph/?g=17sx4
China's M2 has also been going up steadily:
* https://fred.stlouisfed.org/series/MYAGM2CNM189N
What has the Shanghai Stock Exchange (index) been doing lately?
The UK's M2 has been going up continuously:
* https://fred.stlouisfed.org/series/MSM2UKQ
How's the FTSE 100?
> https://fred.stlouisfed.org/series/WM2NS
Now let's overlay the S&P 500:
* https://fred.stlouisfed.org/graph/?g=1gvKR
A giant spike in M2 in 2020, and yet at the same time the S&P 500 dropped. M2 has been on a downward trend since April 2022, and the S&P 500 bottomed in ~October 2022, but has been rising since then—while at the same time M2 has been dropping.
If you go through my posting history you'll see I've more than once mentioned that velocity is much more important than simple quantity.
A good analogy from Cullen Roche that I often use:
> But also – why do so many people insist that inflation is an increase in the money supply? This makes zero sense. Here’s why – our economy is mostly a credit based economy. So, if I take out a loan for $100,000 then the money supply has technically increased by $100,000. But what if I don’t actually tap that loan? What if I borrow the money because, for instance, house prices just went up 25% and I want to have some cash around for emergencies? This doesn’t tell us anything about prices, living standards or really anything. But this is what so much of the money supply represents – money that has been issued and is just sitting around unused. Why is this useful? It’s like calculating your weight changes by counting how much food you have in your refrigerator. No. That’s potential calories consumed and potential weight gain. The amount of food in your fridge tells you little about your future weight changes just like the amount of money in the economy tells us little about the actual price changes in the economy.
* https://www.pragcap.com/three-things-i-think-i-think-i-see-d...