<blockquote>
<p>Am I right concluding that:</p>
<ul>
<li>Stock markets are probably over-evaluated, considering the earnings in 2016?</li>
<li>Stock markets are over-optimistic regarding the earnings in 2017?</li>
</ul>
</blockquote>
<p>No, you cannot draw that conclusion a priori. You can conclude that the market expects a big increase in profits in 2017. You can have an <em>opinion</em> about whether the market is over-optimistic, but unless you got divine insight, or have better models than they do, you cannot conclude that their forecast is wrong. Remember that the market is a collection of people with access to roughly the same information that you have access to.</p>

CC BY-SA 3.0
2017-01-19T15:24:16.513Z
I agree with you, regarding my second statement. By writing 'over-optimistic' I'm expressing my opinion. I'm correcting my conclusion in that sense, because I'm still interested. Is my logic correct, or this P/E ratio thing is meaningless?
jmgonet
CC BY-SA 3.0
2017-01-19T15:33:56.833Z
What about my first statement? Would it be correct?
jmgonet
CC BY-SA 3.0
2017-01-19T15:35:00.183Z
@jmgonet I find it intresting that the market seems to value french/spanish profits at a hefty discount compared to US profits. That means that the market sees higher risk in Europe. If 2017 proves to be a good year then european stocks should go better than US stocks.
Klas Lindbäck
CC BY-SA 3.0
2017-01-19T15:39:25.977Z
@jmgonet The market always looks to the future. You can conclude that the stock markets are overvalued if you assume that earnings won't increase. So, yes, based purely on the 2016 P/E ratios the stock market seems overvalued.
Klas Lindbäck
CC BY-SA 3.0
2017-01-19T16:37:24.637Z
About my personal opinion of the market being over-optimistic, would it be correct to say that, as PER = Market Value / Earnings, the market expects the US companies to increase their earnings ΔEarning = 100 * (PERf / PERt - 1) = +92% in 2017?
jmgonet
CC BY-SA 3.0
2017-01-20T08:09:09.450Z
@jmgonet Yes. Note that the P/E ratio is based on earnings post tax, so a chunk of the expected earnings increase could be in the form of tax reductions promised by Trump.
Klas Lindbäck
CC BY-SA 3.0
2017-01-19T14:47:40.167Z
2017-01-19T14:47:40.167Z
2020-06-17T09:40:54.643Z
Klas Lindbäck
<p>I've recently found this web page, listing the average P/E Ratios of main stock markets:</p>

<ul>
<li><a href="http://www.zutosmoney.com/" rel="nofollow noreferrer">http://www.zutosmoney.com/</a></li>
</ul>

<p>Here I reproduce just a small extract:</p>

<ul>
<li>INDEX - Country - Trailing PER - Forward PER</li>
<li>CAC40 - France - 24.3 - 13.2</li>
<li>IBEX35 - Spain - 21.4 - 12.7</li>
<li>NASDAQ - US - 34.5 - 18</li>
</ul>

<p>I've noticed two things:</p>

<ul>
<li>Most trailing P/E ratios are quite high: I understand that 'normal' values should be in the range of 16 - 20.</li>
<li>There is a very big difference between trailing P/R and forward P/R. I understand that trailing is calculated using the actual earnings of past year, and forward is calculated with the companies' annual forecasts. </li>
</ul>

<p>Am I right concluding that:</p>

<ul>
<li>Stock markets are <em>probably</em> over-evaluated, considering the earnings in 2016?</li>
<li>Stock markets are <em>possibly</em> over-optimistic regarding the earnings in 2017?</li>
</ul>

<p>[Edit: I've corrected my conclusions after answer from Klas Lindbäck, to avoid expressing too strongly my personal concerns about the earnings of companies in 2017]</p>

<macroeconomics><stock-market><applied-econometrics>
How can trailing and forward P/E ratio of main stock markets show such huge difference
jmgonet
# How can trailing and forward P/E ratio of main stock markets show such huge difference

(Asked by: username_0 on 2017-01-19)

I've recently found this web page, listing the average P/E Ratios of main stock markets:

* <http://www.zutosmoney.com/>

Here I reproduce just a small extract:

* INDEX - Country - Trailing PER - Forward PER
* CAC40 - France - 24.3 - 13.2
* IBEX35 - Spain - 21.4 - 12.7
* NASDAQ - US - 34.5 - 18

I've noticed two things:

* Most trailing P/E ratios are quite high: I understand that 'normal' values should be in the range of 16 - 20.
* There is a very big difference between trailing P/R and forward P/R. I understand that trailing is calculated using the actual earnings of past year, and forward is calculated with the companies' annual forecasts.

Am I right concluding that:

* Stock markets are *probably* over-evaluated, considering the earnings in 2016?
* Stock markets are *possibly* over-optimistic regarding the earnings in 2017?

[Edit: I've corrected my conclusions after answer from Klas Lindbäck, to avoid expressing too strongly my personal concerns about the earnings of companies in 2017]

**Tags:** macroeconomics, stock-market, applied-econometrics

---

## 1 answers

### Answer by username_1 on 2017-01-19. Score: 1 | Accepted answer

> Am I right concluding that:
>
> * Stock markets are probably over-evaluated, considering the earnings in 2016?
> * Stock markets are over-optimistic regarding the earnings in 2017?

No, you cannot draw that conclusion a priori. You can conclude that the market expects a big increase in profits in 2017. You can have an *opinion* about whether the market is over-optimistic, but unless you got divine insight, or have better models than they do, you cannot conclude that their forecast is wrong. Remember that the market is a collection of people with access to roughly the same information that you have access to.

> **Comments:**
> **username_0**: I agree with you, regarding my second statement. By writing 'over-optimistic' I'm expressing my opinion. I'm correcting my conclusion in that sense, because I'm still interested. Is my logic correct, or this P/E ratio thing is meaningless?  
> **username_0**: What about my first statement? Would it be correct?  
> **username_1**: @jmgonet I find it intresting that the market seems to value french/spanish profits at a hefty discount compared to US profits. That means that the market sees higher risk in Europe. If 2017 proves to be a good year then european stocks should go better than US stocks.  
> **username_1**: @jmgonet The market always looks to the future. You can conclude that the stock markets are overvalued if you assume that earnings won't increase. So, yes, based purely on the 2016 P/E ratios the stock market seems overvalued.  
> **username_0**: About my personal opinion of the market being over-optimistic, would it be correct to say that, as PER = Market Value / Earnings, the market expects the US companies to increase their earnings ΔEarning = 100 * (PERf / PERt - 1) = +92% in 2017?  
> **username_1**: @jmgonet Yes. Note that the P/E ratio is based on earnings post tax, so a chunk of the expected earnings increase could be in the form of tax reductions promised by Trump.  

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