Cap markets - P/E ratios

CFA Level III Economics
#1

“P/E ratios highest in early stages of recovey. High inflation depresses P/E ratios.”

Can anybody explain this?

#2

My two cents

  • P/E ratios high in early stage of recovery : As the market price the coming improvnig situations (and therefore future earnings) the price increase leading to higher P/E

  • High inflation tends to inflate earnings therefore decrease P/E

#3

The first is okay.

The second isn’t. High inflation would not affect P/E ratios _ only _ if there was a 100% pass-through of inflation to earnings, this was in level II material.

The real reason not mentioned is that high inflation pushes up the discount rate (more than offsetting higher growth), so valuations go down.