Why PE ratio soared till financial crisis in 2008
We all know why the PE ratio was high at 2000. The dot-com companies were simply overvalued. But why did PE ratio increase till the financial crisis in 2008? Was it because of the housing bubble? What kind of companies were overvalued? The banks that lend the house owners?
First "2008" in the text is actually "2000"? I am lost.
It was because markets can be irrational. People felt overconfident and unwilling to see how things were going to get bad.
You can easily google an in depth explanation.
Simple answer: It increased the same way all asset bubbles are created with way too much money in the system, not enough quality deals, and a lack of fear----A pint of sweat will save a gallon of blood
Can anyone specifically tell me what kind of stocks were overvalued? I'm guessing the finance sector/housing...
Also, why did PE ratio stay in range till 1990? Were investors generally more cautious with their valuation?
I tried google but didn't find any specific answer except why it collapsed (for 2008- financial crisis).
P/E is also just one multiple of many don't forget. It can grow due to an increase in P or a decrease in E or some combination of both. Don't try to read too much into it as an aggregated statistic. But, yes if you are looking for a general explanation see above.
PE relates to market beliefs about the future relative to actual reality today. Higher PE = higher beliefs about the future for the same level of earnings.
The run-up to the financial crisis was marked precisely by overly optimistic future outlooks.
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