The simplest way to value stocks or the stock market is to take its price and divide it by earnings (i.e. P/E).
There are many ways to apply the P/E. For the stock market, strategists often take the price of the index and divide it by the index’s earnings.
In his June monthly chartbook, Morgan Stanley’s Adam Parker considers the stock price against expected earnings (i.e. forward P/E). Then he compares that ratio to the stock’s average forward P/E in the past five years.
Then Parker saw how many stocks were trading above its average historical forward P/E. That’s what’s charted below.
Simply put, this chart shows that more than half of the stocks in the stock market are trading above their own average valuations.
In other words, the stock market appears to be broadly expensive.
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