Index valuations may flatter large companies

Increases in the FTSE 100 price/earn­ings ratio (P/E) suggest that large-cap stocks may not present the value prospects many are relying on.

The average P/E of FTSE 100 companies has risen from 11.6 on August 6, 2007, at the height of the boom, to 14.5 on August 4 this year, according to the FTSE Group. The index itself remains about 3% below its value in August 2007, indicating that much of the rise in p/e has come from falls in earnings.

The ratio is trading above its long-term average at a time when austerity measures are expected to hit large-cap revenues and global demand.