Despite the corrections at the end of 2018 and the Covid-19 shock, price-earnings ratios remain at high levels, particularly in the United States. However, based on indices adjusted for expected growth and the level of interest rates, this trend does not appear to be the result of irrational exuberance like in previous speculative episodes.
Chart 1: Cyclically adjusted P/Es and interest rates in the United States Sources: S&P 500, Datastream, Fed Saint Louis & Philadelphia. Author’s calculations. Most recent value: October 2020