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US Stocks Real Returns vs PEses from 1960

The real stock market return over 17 year periods historically has the best correlation with the PEses (real price / simple exponentially smoothed real earnings). The chart shows the return for a 17 year period with the PEses at the beginning of the period. The green PEses scale or axis is inverted to show that a period of strong stock market return begins with a low PEses (high on chart), while a period of weak return begins with a high PEses (low on chart). The last point of the PEses suggests what the return for period beginning last month and ending in 17 years will be.

The correlation in the data from 1960 forward shown in the chart appears to be more robust than the correlation using data all the way back to 1890. It is unclear which time period will give the best indication of the future.