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Sensex Falls When PE Rises Above 20
May 3, 2018


Do valuations play an important role in the returns that you get from stocks?

Yes.

We did a decade long comparison of the Sensex versus the its price to earnings ratio...and it certainly seems to suggest so.

Yesterday, Sarvajeet looked at the impact of US fed's rate hikes on the Sensex. Today we'll have a look closer home. We wanted to know how earnings drove the returns of the Sensex.

Price to Earnings (PE) is basically the price that you pay for earnings. A higher PE implies expensive valuations.

We found that the Sensex has fallen sharply whenever its PE moved above 20.

Conversely, PE levels below 15 have led to a sharp subsequent rally.

Such strong co-relation also proves that ultimately, it's valuations that drive future returns in the stock market.

You would thus be well served by focusing on fundamentals and valuations while ignoring the noise of the market. Tanushree Banerjee, editor of The 5 Minute WrapUp, can guide you in this endeavor.

Data Source: Ace Equity

This Chart Of The Day was published in The 5 Minute WrapUp - If You Want High Returns from Stocks... Look for the Dog that Doesn't Bark

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