Abstract
This analysis sought to determine an upper limit for the S&P 500 price-to-earnings ratio (P/E) under normal market and economic conditions considering interest rates. Data covered the period from Jan 1962 to Jan 2021. Time series were the weekly S&P 500 price, earnings, P/E, plus the yield of the US 10-year treasury bond. Exploratory data analysis showed smoothing and linear regression would be inappropriate. Instead, clustering with proper visualization answers the question. The 95% upper limit for the S&P 500 P/E under normal market and economic conditions is 25.73, if the 10-year yield is < 7.0%. A more aggressive 99% upper limit is 29.27. Upper limits for the S&P 500 P/E at higher interest rates may be found by using the visualization.
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