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There is a simple way to improve the forecasting ability of the price-to-earnings ratio.
That’s good news because, despite perhaps being the most widely followed valuation indicator on Wall Street, the P/E ratio has a mediocre track record, at best. In fact, when tested on data back to 1871 from Yale University professor Robert Shiller, the P/E’s ability to forecast the S&P 500’s subsequent total real return is only barely statistically significant, regardless of whether one is focusing on the subsequent one-, five- or 10-year…
