To summarize, the P/E ratio expansion or contraction depends on many factors such as future earnings expectations, economic conditions and investor sentiment. A strong economy, low interest rates and optimism on future earnings normally command a higher P/E ratio and rising stock market. Conversely, a weak economy, rising interest rates and low earning expectations will drive the P/E ratio and stock market lower.
Therefore, shorter-term market performance is more related to P/E influencing factors like earnings expectations, economic growth, interest rates and market sentiments.
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Henry Ma is the President & CIO at Julex Capital Management, a participant in the ETF Strategist Channel.