When interest rates decline, P/E multiples increase; conversely, when rates rise, multiples contract...
When interest rates decline, P/E multiples increase; conversely, when rates rise, multiples contract. This is a simple mathematical axiom of financial analysis and stock valuation and is at the heart of the investment issues facing equity portfolio managers today. With rates at historically low levels, if the US economy rebounds to the current forecast levels of 2.5% and 3.5% annualised GDP growth for the upcoming second and third quarters respectively, rates will rise and P/E multiples will contract. This axiom has already manifested itself in the past few months. The technology sector...
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