The “Price/Earnings” ratio is a common measure of whether the overall stock market is “undervalued” or “overvalued”. The average Price/Earnings ratio tends to be in the 15-20 range historically. If the current Price/Earnings ratio is 25 you would say that the overall stock market is:
A. valued properly – stock prices will grow at a relatively constant rate for the next 6 months
B. undervalued – for some reason stocks are trading for prices below average; now may be a good time to purchase stocks while they are “on sale”
C. overvalued – watch for the growth in stock prices to slow down or turn negative in the upcoming months.