18th February 2015
The FTSE 100 is at a 15-year high, and is near its record closing level of 6,930 achieved on 30th December 1999, but if you look at the price to earnings ratio of the market, the FTSE was twice as expensive back then.
The current P/E of the UK’s largest companies currently sits at 16 times earnings, analysis by Hargreaves Lansdown, the adviser has shown. This is close to the dizzy heights of almost 30x earnings reached in December 1999, it said. The long term average is 15x earnings.
The P/E ratio is a much better measure of whether the market is expensive or cheap because it looks at the price of company shares compared to the profits made by those companies. This figure tells us how buoyant, or subdued, market sentiment is.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “It is tempting to think a new peak in the market is a good time to sell, but investors shouldn’t get spooked by the FTSE 100 reaching new highs. The headline index doesn’t tell us anything about how stock prices relate to company earnings, it is therefore a bit like a clock face without any hands.
“When you factor in company earnings, the UK stock market looks close to its long term average. In other words the glass is either half empty, or half full, depending on your point of view.
“In the short term the UK election may cause some turbulence for UK stocks, but an improving economy, low interest rates and low inflation provide a positive backdrop for UK companies.”