Will inflation affect valuations?
What will happen to market multiples (ie Price/Earnings ratios) as inflation and rates rise?
If we replay the 1970's experience, we expect valuations to fall as rates rise, regardless of underlying earnings. To see this visually, we compared earnings yield (E/P) and 10-year constant treasury maturity yield over time.
This makes perfect sense. As inflation and yields rise the discounted cash flow from future earnings becomes less valuable.
Robert Lloyd, CFA®
Chief Investment Officer
Lloyds Intrepid Wealth Management
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