Summary
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While some forecasters see a connection between market valuation and an economy’s speed limit, the European, U.S. and Japanese experiences demonstrate instead that a downshift in potential GDP growth apparently has little impact on stock ratios.
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Movements in P/E multiples seem to be driven predominantly by cyclical factors, such as the end of recession, and financial factors, such as long yields, and much less so by trend factors.
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In the light of this week’s analysis, it appears that the economy’s “new normal” era spawned by consumer and credit deleveraging is likely to have more of an effect on earnings growth than on what investors are willing to pay per unit of earnings. Japan provides an eloquent case in point.
