I always want to know what the S&P 500 is trading at in terms of its forward P/E because it gives a good snapshot in terms of valuation compared to it’s history. If the market is expensive, it will surely influence my individual stock picking because that particular market is more vulnerable to a sharp downdraft. Today’s market looks attractive, but is it?
Yes, No, Maybe So
Assuming an approximate estimate of $100 per share in earnings, the market is a little less than 12x forward earnings. That compares favorably with history, so does mean it is time to dive into stocks? Not necessarily. I say that because the level of uncertainty is unusually high right now due to many factors. Among them are Europe’s woes, our debt problems, and our anemic growth. The risk of another recession is high as well.
For these reasons and more, I don’t think we can fully trust the “E” in P/E. There is a strong chance that it could be slashed which would make the market automatically more expensive. That is why buying purely on valuation right now is not a strong argument in my opinion. Now if growth accelerates from here than the market is certainly cheap, but that is no given.
The main point is not to fully trust the headline numbers and to look at the bigger picture behind the numbers. Simply taking a static snapshot of the valuation and saying it is cheap is not a good way to make money. There is always a story behind the scenes and those that can read between the lines have a distinct advantage over those who can’t. So right now I am not willing to say the market is cheap given all the uncertainty. If some of the fears come to pass, believe me, the market can get much cheaper.
Market Not As Cheap As It Seems is an article from: 
