What is the price/earnings ratio of the overall market?
Share investors are no doubt familiar with the concept of the price/earnings ratio for an individual stock. This ratio is defined as the market price of a share expressed in cents divided by the earnings per share also expressed in cents. The ratio can be described as the number of years’ purchase inherent in an investment in that particular share. Investors may be less familiar with the concept of the weighted average price/earnings ratio of the overall market – or, more accurately, of all the stocks in a specific stock exchange index, such as the All Ordinaries or the S&P/ASX 200. This ratio is defined as the total market capitalisation of the stocks in the relevant index divided by the total last year earnings of those stocks. The long term trend for the price/earnings ratio of the Australian market is usually said to be a ratio of around 15. However, as the figures in the table below show, this ratio has fluctuated enormously in recent years and has in the main been higher. If the
