Here’s the price-earnings ratio for the S&P 500 since World War II. Right now it’s hovering a little above 25. In the past three decades, it has never reached that point without leading quickly to either a deep correction or a full-blown recession.¹ Of course, we just passed a big tax cut even though the economy is running at 100 percent of its potential. So maybe that will inflate it even more, leading to an even bigger correction/recession than usual. Fun times.
¹If you’re wondering why the PE usually spikes upward during a recession, it’s because earnings crater faster than stock prices. When the denominator goes down, the PE goes up.
