Bar chart showing the median trailing price-to-earnings ratio for different ranges of 10-year interest rates. For rates less than 2%, the median trailing P/E ratio was 19.2, for 2% – 4% it was 17.9, for 4% – 6% it was 18.4, for 6% – 8% it was 17.2, for 8% – 10% it was 13.1, and for greater than 10% it was 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% | 2.39% | 2.59% | 4.62% | 6.10% | 7.24% |
Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 1963, to March 31, 2024. Inflation data as of February 29, 2024. The average price to earnings was calculated using the S&P 500 index from 1963 – December 2023. Investing in stocks involves risk and their returns and risk levels can vary depending on prevailing market and economic conditions. 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
- High 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. Historically, these have not adjusted lower until interest rates have reached significantly higher levels than current rates.