Source: Wolf Street, by Wolf Richter
This chart shows “multiple compression” is coming.
How long can this surge in stocks go on? That’s what everyone wants to know. Projections range from “forever” – these projections have become increasingly common – to “it’s already finished.” That’s a fairly wide range.
Everyone has their own reasons for their boundless optimism or their doom-and-gloom outlooks. But there are some factors – boundless optimists should push them aside assiduously – that, from a historical point of view, would trigger tsunami sirens. Because in the end, it’s not different this time. And the cycle of “multiple expansion” and “multiple compression” is one of those factors.
For example, a stock trades at a price that gives it a P/E ratio of 20 (stock price is 20 times earnings per share). When earnings per share remain flat over time, but the stock price rises, then the P/E…
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