Chart: Understanding the relationship between rates and P/E ratios
- Chart on the Go
Get an at-a-glance view of how investors can tell if the stock market is “cheap” or “expensive.” And why it matters.
- There’s an inverse relationship between interest rates and price-to-earnings (P/E) ratios. Understanding this relationship can help investors gauge the relative value of P/E levels and whether the stock market is cheap or expensive.
- When bond yields drop, stocks can look more attractive, drawing in investors who are willing to pay more. As a result, the S&P 500 tends to have a higher P/E multiple when interest rates are lower — that’s the key point we are at today. If interest rates rise, stock P/Es should head lower.