In a bull market, overly exuberant investors can bid up the price of stocks faster than earnings rise. That causes the price earnings ratio to increase. When multiples reach excessive levels, buyers may hesitate to continue buying and sellers may decide to take profits. That causes a short term decline is stock prices that usually brings prices back to more typical price earnings ratios.
Related Fool Articles
Recent Mentions on Fool.com
- Last Week's 5 Dumbest Stock Moves
- Gold Miners Are an Insurance Policy, Not an Investment
- Dollar for Dollar: Dollar Tree to Buy Family Dollar
- Are Baby Boomers Responsible for the Low Labor Force Participation Rate?
- Is Half the Country in Serious Financial Trouble?
- Facebook, Inc.'s Q2 Earnings Even Better After Further Review