http://online.wsj.com/mdc/public/page/2_3021-peyield.html Wall Street Journal is showing Russell 2000 trailing PE over 75 and forward PE above 25. 1. Is this correct or bad calculations ? 2. If this is correct, how can FED deny that we are not in a bubble (at least Russell 2000) ?
I believe it could happen if there is deflation or inflation, as long as the economic is ok. In case of deflation, the cash flow discounting leads to a high PE (because of low interest rates), and the stocks receive further gains from rise in the dollar. The difficult part is: an economy that is working ok to well.
I can't expect forward PE above 20 sustainable even with low interest rates. In fact 15 is more reasonable. Just based upon this fact, Russell 2000 is poised to fall around 30% in next few months.
Heard a comment last week about "R2000 = 75x PE"... but only "25x" PE for 2014. What? Consensus is for 200% increase in earnings, YOY? Seems like that presumption should be a fade.
I haven't looked at the P/E data carefully, but small-caps have been on a tear. In addition, the Russell 2000 recovered from the 2000-2003 and 2008 crashes more quickly than the S&P 500 or Nasdaq (which is still well below its all-time high). If any index is in a bubble, it's the Russell. Having said that, valuations can remain elevated for a long time. Stocks don't always crash in a "few months" due to high P/Es. Valuations for the entire stock market were in bubblish territory for most of the late 90s...yet it took about 4 years before it all came crashing down.