Part 6/9:
- Valuation Adjustments: Changes in how stocks are valued have played a crucial role. Demand for stocks can drive prices up, creating instances where stock valuations climb without underlying earnings growth. This phenomenon can mislead investors regarding actual profitability and expected returns.
The Implications of Evaluating Returns
The relationship between stock prices and earnings introduces a powerful lesson in investing. Over the long term, stock valuations should ideally move in tandem with earnings growth. Yet, current studies indicate that the price-to-earnings (PE) ratio of the S&P 500 is considerably elevated compared to historical averages.