The claim that the market is good at predicting future earnings.
This is conceptually very easy to test; get historical stock price and earnings data, compute P/E ratios at each snapshot, compute earnings growth across snapshots, and then look at the relationship between the two. Vanguard ran the numbers here (page 7), and two ways of calculating the P/E ratio were the strongest two factors. (As one would expect, 1-year returns were very difficult to predict at all, and they were mostly useful for 10-year returns.)
If I've understood that document correctly, they aren't saying anything about predicting performance of individual companies, they're looking at some sort of averaged P/E ratio and relating it to future performance of the stock market as a whole.
One way for that to work would be for individual stocks' P/E ratio to be indicative of their future performance, but there are others; e.g., maybe overall economic conditions influence both investors' attitudes and future performance. In the latter case, P/E ratio might be less useful (or outright useless) for comparing companies at a single time.
This thread is for asking any questions that might seem obvious, tangential, silly or what-have-you. Don't be shy, everyone has holes in their knowledge, though the fewer and the smaller we can make them, the better.
Please be respectful of other people's admitting ignorance and don't mock them for it, as they're doing a noble thing.
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