Why the PE ratio no longer makes sense in today’s market
With markets hitting record highs, investors clinging to the old PE ratio risk missing the real story: shifting fundamentals in a transformed economy.
Andrew is the founder and CIO of Montaka Global Investments, a global equity manager based in Sydney and New York.
Stock markets around the world are hitting fresh records. The relentless march higher is naturally triggering a fear of heights and concerns that markets are entering dotcom-bubble-like valuations.
The PE ratio of the S&P 500, at 25.7 times, is particularly high by historical standards.
However, in today’s increasingly complex and dynamic environment, traditional rules of thumb such as the PE ratio are of limited use.
Instead, investors need to go back to first-principles thinking — setting aside market narratives in favour of a clear focus on business fundamentals — to assess the broader market and opportunities in individual companies.
