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P/Es have Risen in the Wake of Rate Increases

Gary Black

For those concerned about the potential negative impact of rising rates, here's some encouraging research on the relationship between P/E ratios and U.S. Treasury yields during the past 60 years. P/Es were actually higher when long-term Treasury yields were in the 4% to 6% range than when they were in the 2% to 4% range, given that long-term Treasury yields under 3% are usually associated with high tail risk uncertainty. So, while an increase in long rates from 2% to 3% or even 4% may unsettle the markets near term, it may portend better economic growth and less tail risk ahead, which historically has been good for both earnings and multiples after the initial shock.

SP 500 Trailing P/E Ratios and 10YR Treasury Bond
Past performance is no guarantee of future results.
Source: Empirical Research Partners Analysis via Federal Reserve Board

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

The information in this report should not be considered a recommendation to purchase or sell any particular security.
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