Market Commentary

Stock Valuations

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The stock market constantly moves up and down and sometime in a startling way as we saw this week. At times this movement is for valid reasons and sometimes for no reason at all. Despite this erratic type of behavior the long term driver is corporate earnings. Generally if earnings for a company go up the stock price will go up with it. However, it is not a perfect system because the buyers and sellers of stocks are people and as we all know people can be reasonable or very unreasonable at times. Still, basically it is all about earnings.

We measure the value of stocks in various ways but the basic most simplistic metric we use is the P/E ratio (Price to Earnings). The average over long periods of the P/E ratio for the S&P 500 companies is 15. This is a broad indicator that covers about 80% of the entire market value of all publicly traded companies. Today, after a very strong correction, some would say a weak bear market thus far, the P/E ratio stands at 15, the same as its long term average.

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