Last year I wrote about the high earnings multiples of U.S. stocks. One of the easiest measurements of a stock, or stock market, is the relationship of earning to prices. For example: if Company A earns $1 over one year and the price of the stock is $20, its price earnings ratio is 20 (take the earnings and divide it into the share price). If Company B had earnings of 80 cents and it too had a stock price of $20, its price earnings ratio would be 25 (20 divided by .8). Currently, the trailing price earnings ratio (past years’ earnings) for the S&P 500 is 24.91.
