The conventional tool for assessing the valuation of stockmarkets is the price/earnings (p/e) ratio, calculated by dividing the level of the index by its aggregate earnings. If these profits are in the past, you have a historic p/e ratio; if they represent analysts’ forecasts for the year ahead, it is a prospective p/e ratio. Earnings normally rise in a period of economic growth and fall in a recession, often sharply. Markets decline, but not as far as earnings, as investors discount a rebound in the future.
Similarly, investors
