Research
What the market expects from US earnings
US stocks look expensive against near-term earnings, but cheaper when ambitious growth forecasts enter the calculation. The difference reveals how much investors are counting on future profits.
A market can look expensive by one valuation measure and cheap by another.
The difference often comes down to what investors expect companies to earn in the future.
Three numbers in the sample’s late-August market snapshot illustrate the point: a forward price-to-earnings ratio of 20.3, expected annual earnings growth of 25%, and a price-to-earnings-growth ratio of 0.81.
Together, they tell a story about the expectations built into US share prices.
The forward price-to-earnings ratio, or forward P/E, compares share prices with the earnings analysts expect over the next 12 months.
At 20.3 times expected earnings, investors are paying roughly $20.30 for every dollar of forecast annual profit.
Finanzamille membership
Keep reading. See the bigger picture.
Become a member for the full story, the Daily Brief, and a clearer perspective on the markets.