The Sensex, plotted with its historical P/E and EPS Growth, makes for interesting reading.
From November 2004 to April 2006, EPS growth % was greater than the P/E. The sense shot up from 6000 to 12000 in that time.
Since April 2006, EPS growth as been choppy, and largely has remained below P/E. Yet, the Sensex as climbed from a low of 9000 to 15,000 today. Earlier, from 1997 to mid 2000, the EPS growth trailed and was indeed negative, yet the sensex went from 3000 to 5000+.
The exuberance in the markets in 1999-2000 must have contributed to high P/Es in the face of declining earnings.
Current EPS growth is around 20, and the P/E is around 20. Not unfairly valued; yet, earnings growth since April 2006 have trailed the P/E. And in this period, the sensex has moved remarkably fast – from a low of 9000 in Jun 06 to a high of around 15,500 today.
Sensex EPS growth has been muted in the last quarter. It will be important to note if the EPS continues to contract its growth – if the P/E doesn’t follow, we enter a stage of exuberance.
Such charts have little tradeable value but it’s important to know where we stand historically – to see if a pattern existed. I don’t have data going back earlier than 1994 so some of this is statistically too little; but even with this I can’t see a distinct pattern in there, except that when earnings SERIOUSLY lag the P/E, there is a case for markets to fall (and even that can take two years!).
Do you see anything in there that could be useful?
Like our content?Join Capitalmind Premium.
Equity, fixed income, macro and personal finance research