Understanding Market Breadth, P/E Calculations, and Valuation Indicators – 04/19/2025
Follow Us on Your Favorite Streaming Platforms
The show began with a brief market report, noting that the S&P 500 was down 1.5% for the week despite more stocks going up than down, highlighting a mixed market.
A significant portion of the episode was dedicated to explaining price-earnings (P/E) multiples. Todd clarified the difference between a simple P/E (average of individual P/Es, excluding negative earnings) and an aggregate P/E (total market cap divided by total earnings, including negative earnings), noting that Barron’s uses the aggregate. They further differentiated between market-cap weighted P/E, influenced by larger companies, and equal-weighted P/E, where each stock has the same influence, with Todd mentioning different sources providing varying figures for the equal-weighted S&P 500 P/E.
The discussion then shifted to market valuation indicators, with Todd explaining the Buffett indicator, which compares total market cap (using the Wilshire 5000) to GDP, and the Schiller P/E, a 10-year inflation-adjusted P/E ratio. Both of these indicators suggest that the market is currently expensive. John raised concerns about the Buffett indicator’s applicability due to the shrinking number of publicly traded companies since the Sarbanes-Oxley Act.
The hosts also touched upon the perspectives of successful investors. Felix Zulauf’s accurate market predictions were highlighted as an example of valuable insights from experienced investors. Furthermore, Jeremy Siegel’s theory of potentially permanently higher P/E multiples due to increased global money supply was discussed