When ‘P’ and ‘E’ Spell Profits. P/E ratio can mean many things to many investors Simple definition: How much you pay per dollar of stock’s earnings; A stock selling at $20 that earned $1 per share would have a P/E of 20. More complicated definitions:
Stock Prices grew faster than earnings. Therefore, P/E expanded.
Loughlin (1996): Quarterly data for 1968-93, S&P 500
• Bodie, Kane, and Marcus(1993):
Po = 1 + PVGO
E1 K E1
P/E and E/P are used as dependent variables. The Independent variable and their expected signs are presented in Table 1.
Dividend yield on S&P 500
Money Supply (MZ)
FED P/E index
Trailing volatility of returns
Trailing S&P 500 returns
GDP quarterly growth