Does Nifty P/E predict the next five years' returns?

The question

Investors are often told to buy when the market's P/E is low and be careful when it is high. The Nifty 50's P/E is 19.19 today, near the bottom of its range for the past five years, so the question has a practical edge: has a low P/E actually been followed by better returns?

We tested it on the Nifty 50's own record.

How we tested it

• We took the Nifty 50's P/E, as published by NSE, at every month-end from September 2007 to September 2021: 169 starting points.
• For each, we measured the index's price return over the next five years as an annual rate.
• We grouped the starting points by P/E band.

Five years is long enough for valuations to matter and short enough to give us a usable number of periods. The last start is September 2021, because a later start has not had five years yet.

The results

Returns are for the price index; dividends would add roughly a point and a half a year.

What it shows

The floor rises as P/E falls. No five-year period that started below a P/E of 18 returned less than 7.65% a year. Above 22, the worst outcomes fell to about zero. The cheapest starts of all, at P/Es of 12 to 13 in late 2008 and early 2009, returned 16–18% a year.

The median barely moves. Between P/Es of 16 and 24 the typical return slid only from about 12.5% to about 9.2%, and starts above 24 had a median of 12.36%, higher than the middle bands. Across all 169 periods, the correlation between starting P/E and five-year return was essentially zero (−0.00). Leaving out the Covid-distorted starts from April 2020 onward lifts it only to −0.13.

So a low P/E has mainly protected against the bad tail. It has not reliably delivered a better typical outcome.

Why P/E is a blunt tool

Earnings swing, not just prices. P/E is price divided by the last year's earnings. In late 2020 and early 2021, Covid had crushed earnings, and the Nifty's P/E rose to 39.65 in February 2021, the highest month-end reading in our test. Yet a five-year investment from that point returned 11.62% a year, because earnings bounced back. A high P/E caused by a temporary earnings collapse is a very different signal from one caused by expensive prices.

The method changed in 2021. From April 2021, NSE computes index P/E from consolidated earnings rather than standalone, which tends to produce a lower figure. Readings before and after are not perfectly comparable, so a P/E of 22 today is cheaper, in relative terms, than 22 was in 2017.

Five years is short. Over five years, interest rates, a global crisis or an earnings cycle can swamp a valuation starting point. Over ten years or more, the effect of the starting price tends to show more clearly, but our data gives too few independent ten-year periods to measure that well.

Where the P/E stands now

On 1 October 2026 the Nifty 50's P/E was 19.19, with a dividend yield of 1.23%.

• Since April 2021 it has ranged from 18.92 to 33.61, with a median of 22.15. Today's level sits at the very bottom of that range.
• Since 1999 the median is about 20.9. The lowest reading on record is 10.68, in October 2008.

On the history above, a start in the 18–20 band has produced a median of 11.62% and a worst case of 4.65% over five years. That is a reasonable starting point but not a promise, and the single period that returned 4.65% shows how wide the range still is. The Nifty P/E page updates the figure daily, and our October P/E post puts it in context.

How to use it

• Use P/E to set expectations, not to time the market. A cheaper market makes a poor decade less likely; it does not make a good year more likely.
• Keep investing regardless. An SIP buys at every P/E, more units when the market is cheap, so the valuation question matters less to a regular investor than to someone with a lump sum. See SIP vs lump sum.
• For a lump sum, valuation is one input among several. If the P/E is high and you are nervous, an STP spreads the entry over months without guessing.

For the mechanics of the ratio itself, read how to read an index P/E and is the market expensive?

Sources. Nifty 50 P/E, dividend yield and closing levels from NSE Indices; analysis by WealthTicker.

This article is for education, not investment advice. Past returns do not predict future ones.