One can look to simple DCF analysis to reason about P/E ratios in a way that is (somewhat) better than "totally arbitrary". For a particular stock, P/E is inversely related to the required rate of return on the company's investments, and directly (in the sense that an increase in one drives an increase in the other) related to the growth opportunities available to the company. Extending this to a macro-economic sense, one can reason that the P/E ratio of "the market" depends upon the required (nominal) rate of return on capital and level of economic growth.
So, suppose that one believes that -- over say a 10-year horizon starting now -- that the economic policies of the next few years will soon lead to unprecedented inflation, and because of this and other factors, real economic growth will slow down -- as compared to the last
10/20/50 whatever years. They then have a very rational basis for believing that P/Es will be lower going forward than we has been observed in the past.Any differing opinions on my (amateurish) interpretation of Corp Finance
101? Tsnipped-for-privacy@gmail.com wrote: