Bar chart shows P/E ratios supported at various interest rate ranges.
Y-axis: Median trailing price-to-earnings (P/E); x-axis: Nominal 10-year interest rate. Table lists data. Average P/E was 17.
| Nominal 10-year interest rate | Median trailing price-to-earnings (P/E) |
|---|---|
| Less than 2% | 19.8 |
| 2%-4% | 18.2 |
| 4%-6% | 18.3 |
| 6%-8% | 17.2 |
| 8%-10% | 13.4 |
| Greater than 10% | 9.3 |
| Nominal 10-year interest rate | Less than 2% | 2%–4% | 4%–6% | 6%–8% | 8%–10% | Greater than 10% |
|---|---|---|---|---|---|---|
| Average inflation | 2.34% | 2.10% | 2.51% | 4.62% | 6.10% | 7.24% |
Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 1963 to September 30, 2022. The average price to earnings was calculated using the S&P 500 index from 1963 – September 2022. The S&P 500 Index is a market-capitalization-weighted index considered representative of the U.S. stock market. Inflation represented by the Consumer Price Index. The Consumer Price Index measures the average price of a basket of goods and services. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
Key Takeaways
- Higher nominal interest rates have tended to contribute to lower price-to-earnings (P/E) multiples.
- We do not expect meaningful long-term declines in P/E multiples, which have historically not re-rated lower until rates have reached significantly higher levels.