S&P Price-to-Earnings Ratio Says Market is Still 70% Overpriced

If you are choosing to stay in the stock market right now because of any of the following reasons…

  1. It is poised to bounce back
  2. You don’t want to close out losing positions
  3. Stocks are cheap right now

…then the simplicity of the following information may shock you.

Last week the earnings of the S&P dropped to $28.75, down from the previous week’s $45.95. A year ago it was at $78.80. Today’s level of earnings is roughly where the S&P 500 was in 1995 at which time the S&P was selling for around $450.  Today it’s selling at $770 which puts it at a P/E (price-to-earnings ratio) of 27. That’s right – a P/E of twenty seven! In a time where every “expert” says stocks are cheap they are 70% more expensive than the last time earnings were this low.

P/E doesn’t necessarily mean much of anything in and of itself. But historically stock market promoters have pointed to P/E as a sales tool. If you’ve paid close attention to P/E in the past, then you probably know what to do when you are holding something that has a P/E of 27 and is in a downward trend. Hint: It starts with an “s”.

Get your head out of the emotional gambler’s game, start learning about investing!

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