Technological Innovation is Compounding
Technological progress has huge impact on the P/E ratios of companies and the S&P 500. Technologically advanced companies naturally have a higher P/E as it's expected from them to have better future earnings. One of the ways better future earnings happen is through efficiency leaps. These efficiency leaps are important to businesses' margins but it all comes down to:
better tech = more efficiency = lower costs = higher earnings = higher P/E
These innovation cycles bring efficiency leaps that are linked to P/E ratio waves.
We can observe in this chart that the P/E ratio has cycles that coincide with innovation cycles. There were, of course, macroeconomic factors and wars that impacted the P/E, but high P/E can be explained by innovation cycles.
We can also see that each innovation cycle will have higher P/E ratios than the previous. By looking at this chart, it feels that the P/E ratios still have room to grow.
Technological progress has huge impact on the P/E ratios of companies and the S&P 500. Technologically advanced companies naturally have a higher P/E as it's expected from them to have better future earnings. One of the ways better future earnings happen is through efficiency leaps. These efficiency leaps are important to businesses' margins but it all comes down to:
better tech = more efficiency = lower costs = higher earnings = higher P/E
These innovation cycles bring efficiency leaps that are linked to P/E ratio waves.
We can observe in this chart that the P/E ratio has cycles that coincide with innovation cycles. There were, of course, macroeconomic factors and wars that impacted the P/E, but high P/E can be explained by innovation cycles.
We can also see that each innovation cycle will have higher P/E ratios than the previous. By looking at this chart, it feels that the P/E ratios still have room to grow.