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Is the Stock Market Cheap?

December 5, 2012

A standard way to investigate market valuation is to study the historic Price-to-Earnings (P/E) ratio using reported earnings for the trailing twelve months (TTM). Proponents of this approach ignore forward estimates because they are often based on wishful thinking, erroneous assumptions, and analyst bias.
-Doug Short, vice president of research, Advisor Perspectives

 

Here is a new update of a popular market valuation method using the most recent Standard & Poor's "as reported" earnings and earnings estimates and the index monthly averages of daily closes for the past month, which is 1394.52. The ratios in parentheses use the monthly close of 1,416.18. For the earnings, see the table below created from Standard & Poor's latest earnings spreadsheet.

 


? TTM P/E ratio = 16.0 (16.2)
? P/E10 ratio = 20.8 (21.1)

 

The Valuation Thesis

 

A standard way to investigate market valuation is to study the historic Price-to-Earnings (P/E) ratio using reported earnings for the trailing twelve months (TTM). Proponents of this approach ignore forward estimates because they are often based on wishful thinking, erroneous assumptions, and analyst bias.

 

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