THE BOTTOM LINE
- This week, according to most accounts, stocks broke through the record for the longest bull market in history, rising for some 2,383 trading days without a 20% bear-market break.
- During that time, the S&P 500 Index rose over 320% -- a 16.5% annualized rate. Including reinvested dividends, the rise was nearly 410%, an annualized 18.8%.
- But the real—if unanswerable—question behind these mind-boggling numbers is whether this strong market will continue to break records.
- For fundamentals-based investors, a key indicator is valuation – whether stocks are worth what the market is currently paying for them.
- In terms of earnings expectations, stock valuations don’t appear to be overly expensive, trading at a P/E of 17.7 times next year’s forward (estimated) earnings.
- That’s somewhat higher than the average forward P/E of about 16.9, but a far cry from the high of 26.9 reached during the heights of the valuation peak of the Tech Bubble of 1998-2000.
- More notably, earnings expectations have risen in light of strong company earnings, driving the P/E down to about 17.7 – making the S&P 500 more potentially attractive as the year has progressed.
- The bottom line: At this point, stock valuations don’t appear to be excessive by historical measures; as knowledgeable, fundamentals-based active investors know, value can be very different from price.
 “Bull market” is a general term referring to a securities market that is rising, often by 20% or more, without a significant pullback of 20%. A “bear market” refers to a market that has dropped by 20% or more without a significant upward move. March 9, 2008 – Aug 23, 2018 is often referred to as a bull market.
 The price- earnings (P/E) ratio is a stock's (or index’s) price divided by its earnings per share (or index earnings). The forward P/E ratio is a stock’s (or index’s) current price divided by its estimated earnings per share (or estimated index earnings), usually one-year ahead.
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.
The price- earnings (P/E) ratio is a stock's (or index’s) price divided by its earnings per share (or index earnings). The forward P/E ratio is a stock’s (or index’s) current price divided by its estimated earnings per share (or estimated index earnings), usually one-year ahead.
Valuation refers to measures of a security’s price in term of its underlying company’s fundamentals, such as earnings per share, sales, book value, growth rate, etc.