Most investment analysts have been saying lately that the US stock market is expensive. It might look like they’re right at first glance, but Dr. Steve Sjuggerud of The Stansberry Digest has a different take.
Stock Market Value
A classic measure of the value of the stocks and the stock market more broadly is the price to earnings (P/E) ratio – the price of the stock relative to its profit forecast. For the last few years, the P/E ratio has been sitting at around 16.5.
However, look ahead a few years, says Dr. Sjuggerud, and dig a little deeper, and you can find figures that other analysts may have missed.
US corporate profits have been growing strongly and are expected to continue on their upward trend. The S&P 500 earnings are estimated to grow from 163.7 at the end of 2018 to 197.0 by the end of 2020. Taking this growth into account has analysts forecasting the P/E ratio will drop from its November 2018 figure of 16.4 to around 13.7 by 2020.
Taking this strong profit growth into account, the current price of shares relative to the forecast earnings suggests that the market is, if anything, perhaps undervalued. As profits continue to rise, there’s potential for price gains and improved performance in the US market over the next few years.
All of this means that, rather than being as expensive as some analysts might have you believe, the market actually seems to present some value looking forward. That bodes well for continued price appreciation over the next 12-24 months.
Of course, P/E ratios aren’t the only measure of the market. Stay tuned for a look at what Dr. Sjuggerud has to say about the CAPE ratio in our next post.
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