Chart of the Day: High Price to Pay

Today’s Chart of the Day from Bank of America Equity & Quant Strategy shows the price you pay for future earnings explains 80% of the returns for the next 10 years. For example, it makes a difference if you pay $80 or $120 for an annual $5 worth of a company’s earnings. This is called the price-to-earnings ratio, or P/E ratio, and it helps compare the price of a company's stock to the earnings the company generates.

The past is no predictor of the future, but as of Nov. 17, 2023, going back to 1987, the past tells us if you remove the Magnificent 7 (Apple, Google, NIVIDIA, Facebook, Amazon, Microsoft, and Tesla, which are the seven largest stocks in the S&P 500 and together make up more than 25% of the index) the price you pay works out to be a 9% return. When the Magnificent 7 are included, since their prices are so high, the return goes down to 5%. When you stand the 7 alone, their previous returns have been a negative -9%.