P/E of 15
Not much of an academic scholar and pursuing this task would not be beneficial at this stage.
I've decided to call upon the wisdom of the WSO guardians.
Question: Why is 15 the long term average P/E for the S&P 500? How did this number come to be (don't go for the easy answer pls)?
At what point in history, did people decided paying 15 times earnings is good. I wonder if there's some sort of story behind this.
Flip it on its head and you have the earnings yield. mean of the 10y is 4.5ish and the median is just shy of 3.9. a 6.7% earnings yield is deemed to be reasonable compensation for the inherent risk in investing. mean AAA corporate bond is 5.78% going back to 1919, and the Baa is actually higher than the LE PE depending on time period.
these averages are reflective of the inherent differences in risk between stocks & bonds, and investors' demand to be compensated for risk taking.
interest rates are a function of many things: inflation, maturity, credit quality, place in cap structure, callable or not, and so on. at the sovereign level, it's been hypothesized that interest rates are functions of a country's demographics, growth rate, reserves, and other measures of creditworthiness. most everything prices with a spread over sovereign debt, so there you have it.
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