Stock Market Price Earning (PE) Ratio

We use PE ratio (Price per Earning) to gauge whether the market is over value or under value. This information is helpful because it gives us an idea whether we should go long or go short with the market.

As a rule of thumb:

  • ┬áPE = 15 is considered at fair value.
  • PE < 15 is considered under value.
  • PE > 15 is considered over value.

Summary of Major Stock Market Indices PE Ratio.

This Post Has 5 Comments

  1. SnOOpy88

    May I ask, why PE of 15 and not any other number like 10 or 20 ?

  2. Marubozu

    Since 1900, the average P/E ratio for the S&P 500 index has ranged from 4.78 in Dec 1920 to 44.20 in Dec 1999, with an average around 15.

    You can find out more information here:
    http://en.wikipedia.org/wiki/P/E_ratio

    Marubozu

  3. SnOOpy88

    Thank you

  4. KVince

    The inverse of PE can also be thought as earnings yield
    PE = 15 corresponds to approximately 6% earnings yield.
    It should be compared to yield from other investment opportunities.

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