Plus, those historic earnings figures are only updated periodically throughout the year, while the numerator in the P/E ratio — share price — fluctuates daily. That share price will immediately reflect recessionary conditions. The result? Inflated earnings and a lower share price will drive P/E ratios down.

As an example, Macy’s (NYSE: M) P/E ratio at February 1, 2020 was 8.76, derived from EPS of $1.82 and a price per share of $15.95. As of May 20, 2020, the retailer’s stock price had dropped to $5.07 in the wake of the coronavirus pandemic. Updated earnings aren’t yet available, so the current P/E ratio, calculated with the same $1.82 EPS figure, is now down to 2.8.

At the end of a recession, the opposite happens. Previous earnings will be down relative to how the company should perform when the economy is on the rebound. But stock prices will recover quickly. The combination of deflated earnings and higher stock prices will drive P/E ratios up.

An alternative metric

An alternative stock valuation metric that somewhat addresses these issues is the forward P/E ratio, which swaps the company’s projected earnings into the calculation instead of its actual recent earnings.



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