Schweser Book 4 P.379 Why are implied P/E and the index growth rate negatively related? How to compute implied P/E?
implied p/e is the value that a company should have based on its ‘fundamentals’ you have two calculations for pe based on trailing or leading earnings p0/e1=(1-b)/r-g p0/e0=(1-b)*(1+g)/r-g as you can see the higher the growth rate the higher the p/e But when comparing to the industry if the industry has a higher growth rate than the company that means that the company’s p/e needs to be less than that of the index. basically the index incorporates more growth in its P/E
Thanks for the answer.