MONEY GLOBE XIndicators & Calculations · Lesson 6
Valuation: the P/E ratio
Is the market cheap or expensive?
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In this lesson
Calculate a P/E ratio, read the S&P 500's valuation in history, and understand why it's a poor timing tool.
Key takeaways
- P/E = price ÷ earnings per share: what you pay for each $1 of yearly profit.
- The S&P 500's long-run average P/E is roughly 16; above 25 has been historically expensive.
- High valuations have been followed by lower 10-year returns on average, but they are poor short-term timing signals.
- When earnings collapse (e.g. 2009) the P/E can spike; the Shiller P/E (CAPE) smooths this with 10 years of earnings.
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Next lesson: Putting it all together
Educational information only - not financial advice.