to correspond to lower P/E ratios and upwards
sloping yieldcurves to higherP/E ratios.While at
firstsightthismayseemsurprising,theslopeofthe
yieldcurve,atleastintheUnitedStates,hasbeena
leading indicator of economic growth with more
upward-sloping curves presaging higher growth.Based on this regression, we predict the E/P ratio at the
beginning of 2006, with the T-bill rate at 4.31% and the
T-bond rate at 4.39%.
SincetheS&P 500 wastradingatamultipleof18.27times
earningsinearly2006,this wouldhaveindicatedamarket
that is almost correctly priced. This regression can be
enriched by adding other variables, which should be
correlatedtotheprice-earningsratio,suchasexpectedgrowth
ingrossdomesticproductandpayoutratios,asindependent
variables.Infact,afairlystrongargumentcanbemadethat
theinfluxoftechnologystocksintotheS&P 500 overthepast
decade, theincreasein returnonequity atU.S.companies
overthesameperiodandadeclineinriskpremiumscouldall
explain the increase in P/E ratios over the period.
ILLUSTRATION 8.7: Comparing Price-to-Book Value
Ratios across Time
InIllustration8.6,welookedatchangesintheprice-earnings
ratios for the U.S. market from 1960 to 2005. Over that
period,theprice-to-bookvalueratioforthemarkethasalso