Q2 earning’s season will add a dimension to PE analysis
Source: www.tradingview.com
The PE ratio is currently 19.33, higher than its historical average of 15.97 (blue dashed line). In addition, the PE moved above the mean's third standard deviation (red horizontal) during the middle of 2021. This extreme is only the 3rd time in this chart's history (starting in 1871) that the PE has breached the red horizontal. The first was around the tech wreck and the second during the global financial crisis.
The previous two breaches saw the PE ratio pull back to the mean (blue dashed horizontal). So by that measure, the PE is still high.
We've added a 12-month moving average overlay as a signal line. After the blue dashed horizontal was reached in the previous bear cycles, a bullish cross above the SMA suggested that the PE had moved into its next mark-up phase (blue-dashed verticals). This cue is still to happen in the current bear environment (red rectangle).
Earnings for Q2 will kick off this week. Given that this is the denominator of the PE ratio, it will add a dimension to the above analysis. Firstly, if this season sees earnings adjust downwards, we may paradoxically see the PE ratio head higher. This phenomenon is known as the Molodovsky effect - PE ratios increasing into cyclical troughs.
However, the downwards revisions may also affect a price drop. Therefore, if the price drop is more significant than the revision of earnings, the mean (dashed blue line) may still be a sensical level to keep an eye on before we see the bullish cross.
Russell Shor
Senior Market Strategist
Russell Shor is a Senior Market Strategist at FXCM, having been promoted to the role in 2025 in recognition of his depth of insight and consistent delivery of high-impact market analysis. He originally joined FXCM in October 2017 as a Senior Market Specialist.
Russell holds an Honours Degree in Economics from the University of South Africa, is a certified FMVA®, and a full member of the Society of Technical Analysts (UK). With over 20 years of experience in financial markets, his work is renowned for its clarity, precision, and strategic value across asset classes.
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