Are Stocks Cheap?

One of the perpetual great debates among investors is the relative value of stocks. Are they cheap or are they expensive? This would be an easy question is everyone agreed on the correct metric. But they don’t. Some, such as Professor Robert Shiller and fund manager John Hussman, prefer 10-year average smoothed earnings. Others use the last year’s earnings or projected next year’s earnings.

Economist Edward Yardeni has two other metrics he uses, and those currently indicate that stocks are cheap. Yardeni’s metrics aren’t easy to locate or compute, but he says they are good indicators. I’ll let him explain the measures he uses and what they say today. Read here.

For the S&P 500, the forward P/E was at 13.5 on Friday. Monthly data show that the ratio of the forward P/E to consensus expected long-term earnings growth (which tends to have an upwards bias) was 1.26 during February. That’s about the same as the 1.21 average of this PEG ratio since 1985.