Even after a brutal few days for markets, stocks don't look to be cheap. But on the other hand, it's not as if the market is in a bubble.
A peek at the S&P 500's valuation shows that the markets are trading in line with recent average valuations. The S&P's current price is about 15.8 times the earnings analysts expect to see from S&P 500 companies over the next year, according to FactSet. This is exactly in line with the average forward price-to-earnings multiple going back to the beginning of 2000, and a bit lower from the average multiple seen over the past two years.
There are about as many ways to gauge where stocks are going as there are investors. But at the most basic level, a stock is simply an ownership stake in a company, which gives the owner of that stock residual rights to some of that company's profits. This is why determining whether a stock is expensive or cheap often comes down to assessing how much that company is likely to earn, and then seeing how many times that number investors are being asked to pay.
Using consensus analyst estimates is a way of allowing the experts do that difficult first part for you. A forward P/E metric simply takes that number and compares it to the current price. And the same may be done with an index, by aggregating and weighting earnings estimates and using the index price.
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