Equity Valuation and Interest Rates

  • A great historic (1881-2020) chart showing median cyclically adjusted P/E multiples (CAPE) during various interest rate regimes.
  • There is a balance – low interest rates mean future cash flows are worth more discounted but are associated with weaker growth.
  • The chart suggests a goldilocks principle – highest P/Es associated with real interest rates in the middle of the range.
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