Even with this year’s surging corporate profits, the Standard & Poor’s 500-stock index is trading at historically sky-high price-to-earnings ratios. Many “experts” seem to agree that the stock market is monstrously overpriced.
But maybe it’s not.
Let’s look at P/E ratios and see where we really are. Price-to-earnings, for the uninitiated, is simply a stock’s share price divided by its earnings per share. This ratio provides a straightforward measure of how cheap or dear stocks are. But the confusion starts because there are several different varieties of P/E ratios.
Start With the Shiller P/E
Conceived by Nobel economist Robert Shiller, it calculates the market’s P/E based on the average of inflation-adjusted earnings over the past 10 years.
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