Here’s a Fresh Look at Stocks: They’re Cheap
They are the least expensive in seven years, according to the so-called PEG ratio, which measures how much investors are willing to pay for rising earnings.
That may not be all bad.
Photographer: Spencer Platt/Getty Images
If price is any indicator, the stock market rout that began a week ago could end soon. The reason: Stocks, at least by one important gauge, are the cheapest they have been in nearly seven years. The market is also significantly more attractively priced than it has been in other recent periods when stocks have struggled.
The gauge is the so-called PEG ratio, which compares the price investors are willing to pay for expected earnings with how fast those earnings are expected to rise. The exact equation is to divide the market’s price-to-earnings ratio by expected earnings growth, which is where the name comes from. On Wednesday, the PEG of the S&P 500 Index dropped to just under 0.65, based on this year’s expected earnings. On average for the year, the PEG ratio is higher, but it recently dropped below 1, and that’s the lowest annual average going back to late 2011.