So how can investors justify investing in stocks when the PE ratio is at 33? Today's chart suggests that other factors, such as low inflation, help justify these valuations if only a little. For today's chart, we took the S&P 500 earnings yield minus the 12-month inflation rate to get what is referred to as the 'real earnings yield'. In theory, when the real earnings yield is high, stocks are considered undervalued and when the real earnings yield is low, stocks are considered overvalued. The real earnings yield currently stands at 0.96%, a level that suggests the market is still overvalued, but not as much as is implied by the PE ratio. Stay tuned...
Notes:
- Earnings yield is the most recent 12-month earnings divided by price. It is the inverse of the PE ratio.
"The point at which a competitor is pursuing the best possible strategy, given the strategies of the other participants" - John F. Nash
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