Evolution of the PER in bullish and bearish cycles of the stock market

As we saw in this blog, although it has its drawbacks, the PER ratio It is one of the most used in stock investment for its ability to combine two fundamental figures, the price and the benefits. It is also a ratio that can help determine if the stock market in general is overvalued or if it may still have an upward journey. In this article the results of a study on the evolution of the PER in bullish and bearish cycles of the stock market, which can be quite simple, but also very interesting.

Evolution of PER in bullish cycles of the stock market

In the following graph, taken from a study conducted by Crestmont Research, we can see the evolution of the PER in the upward cycles of the market.

Evolution of the PER in upward cycles of the stock market

Evolution of PER in bear market cycles

In this graph we can see the evolution of the PER in bearish market cycles.

Evolution of the PER in bearish cycles of the stock market

What conclusions can we draw from this study?

From this study we can draw 3 conclusions:

  • The market's PER can give us indications about the moment of the stock market cycle that we are experiencing
  • In the PER 20-25 environment, the bag is in a danger zone
  • In the PER 10 environment, the stock is usually at a good price to invest in the long term

Where are we right now?

At this time, according to the information obtained through the blog Perpe (a very interesting blog of financial information that I take the opportunity to recommend), the PER ratios of the world stock markets are the following:

PER of world stock markets

As you can see, not all markets trade at the same multiples. It seems that today, based solely on the PER, the markets with the best price are Russia and Greece, while Cyprus and Ireland are the most overvalued. It is important that you keep in mind that these are the average ratios for each market, so it is possible that, even if a market is overvalued, it still has hidden bargains and vice versa.

I would also like to warn you that it is not a good idea to be guided solely by the PER to determine whether the stock or a certain stock is trading at an expensive or cheap price, but that it is necessary to analyze many other factors, especially future expectations.