What Story Is the Price to Earnings Ratio Telling?

What Story Is the Price to Earnings Ratio Telling?

If you’re trying to get an inside edge on Wall Street, you’re probably paying attention to an array of stats and measurements. But there’s one indicator you might be overlooking.

I’m talking about the price-to-earnings ratio. P/E ratio divides a company’s stock price by its earnings per share. You also can get a P/E ratio for a stock market index, like the Standard & Poor’s 500.

On July 8, the predicted or “future” 12 month P/E ratio of the S&P 500 was 16.3, coming in below the five-year average of 18.6 but above the 20- year average of 15.5.1

Does this mean stocks are undervalued? Perhaps based on the five-year average, but not so much according to the 20-year stat. Potato, potahto. One thing is clear: the P/E ratio tells us that stocks were more expensive late last year than they are today.

One of my favorite sayings is, “Time in the market beats timing the market.” Keep following your established strategy and try not to overthink current events.

1. FactSet Research, July 8, 2022. Forward 12-month P/E is based on analysts’ earnings estimates, which are subject to revisions over time. Financial, economic, political, and regulatory issues may cause the actual earnings forecast to differ from the expectations expressed in the May 12 estimate. The S&P 500 Composite Index is an unmanaged index that is considered representative of the overall U.S. stock market. Past performance does not guarantee future results, individuals can’t invest directly in an index, and the return and principal value of stock prices will fluctuate.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

Dr. Jason Van Duyn
586-731-6020
AQuest Wealth Strategies
President

Dr. Jason Van Duyn CFP®, ChFC, CLU, MBA is a Registered Representative with and Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC. The LPL Financial registered representative associated with this site may only discuss and/or transact securities business with residents of the following states: IN, IL, TX, MI, NC, AZ, VA, FL, OH and CO.

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