Smoke and Mirrors: Earnings Flatter US Stock Valuations
After October’s sharp market declines, many investors might think US stocks look relatively cheap again. But equity valuations require closer scrutiny, and earnings metrics might be distorting the fundamental performance of businesses.
Assessing a stock’s value isn’t always straightforward. Price-to-earnings ratios—the most popular valuation measure—show the S&P 500 trading today at 14.7 times forward earnings estimates, or 18% cheaper than it was at the end of 2017 (Display, left). But other valuation metrics that strip out the impact of tax benefits or focus on sales show virtually no change at all this year.