No. of Recommendations: 1
The definition of what is included in “earnings” is continually changing so if is very difficult to compare earning over time. For example stock option will soon be expensed as they are granted so the definition “earnings”.

The tax rates of capital gains, dividends, and interest income have also changed dramatically and should be taken into account in comparing the past to the future. For example if you somehow calculated a historically “fair” stock value measure, then it would have increased significantly when the capital tax rates were recently reduced. A lot of money is now in tax exempt or deferred accounts, which also tends to skew the historically “average” results.

It is better to look at the inverse of the P/E ratio to look at the E/P to get an earning rate instead (the name of this is on the tip of my tongue! I just can't remember it right now.) For example if you has a P/E of 20 that would be 5% E/P rate of return.. It would make a makes a lot more sense to compare how the current a E/P of 4.4% with a dividend yield of 1.6% and an effective tax rate of X% while inflation is 1.6% and government bonds yield 4.4% relates to the same figures in the past.
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