Dividends and Price to earnings ratios soar even higher

One of the most common ratios investors use is the Price to earnings ratio because it tells you how long you will wait to receive your money back. It is also a easy comparison item as your narrow your selection of stocks to buy or sell. Since the decline of the stocks and now the rally back the ratios are getting larger.

In an article by Caroline Valetkevitch of Reuters, strategists say the P/E ratio could go higher given the monetary stimulus, but the huge uncertainity around earnings this year because of the economic fallout from the virus.

Many companies are expecting lower earnings, because of the shutdown, however there is hope in the market due to the economic stimulus packages and the virus seems to have reached peak levels. If peak levels are reached, then states will begin to open up more of their economies. Not to go to normal, but more people will be out and about.

The S&P 500 P/E Ratio in the beginning of May was 20.1, the highest in 15 years. Analysts believe the number will drop to 17.9%. First quarter earning for S&P 500 companies was expected to be down 14.8%, second quarter to fall 33.3% and third quarter to rise.

Linking to dividend paying stocks, stocks which pay dividends typically trade a consistent multiple because they have reasonably stable earnings. Typically they are less than growth stocks, but as the market goes down the multiples tend to trade up, then as markets move to another phase the multiples decline again but dividends are paid and profits role in.

There are more questions than answers, till the next time – to raising questions.

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