EPS & P/E RATIOS IN TODAY'S ENVIRONMENT

The 'tourist explains the different ways the market looks forward and highlights how we are now paying peak multiple on optimistic earnings forecasts

We can probably all agree that:

1. over the long-run, stock prices follow earnings

2. although earnings can grow faster or slower than the economy, there is a loose relationship between economic growth and earnings

3. stocks are forward-looking instruments, and therefore, we should focus on EPS forecasts as opposed to “realized” backward-looking EPS

Here is a chart …