I’m frequently asked: Is the Market Expensive?
Value is Subjective:
I believe the answer is very subjective. My standard response is: “Value, like beauty, is in the eye of the beholder.” -Adam Sarhan
The P/E ratio is a common ratio used to measure a market (or stock’s ) value. The ratio is derived by dividing the price by earnings. There are many different types of P/E ratios but for the most common used is trailing twelve months (a.k.a. TTM). From an objective standpoint- the S&P 500’s (SPX) current P/E ratio is ~18. Historically, this is around “fair value” (mid teens) and it is currently lower than prior major market tops. In fact, the past two major market tops are highlighted below and the SPX’s P/E ratio was above 21 in both instances.
Cheap or Expensive:
Value is subjective because from 1984-2014 the SPX soared over 1,000% (from 165-1950). During that time, the P/E ratio was above 20 for 18 years and below 20 for 13 years- Hardly conclusive evidence. So, is the market expensive? Not from where I sit.