What about Valuations ?
“Nowadays, people know the price of everything and the value of nothing”
Oscar Wilde wasn’t referring to stocks here but it describes exactly how some people think about them.
A stock’s P/E ratio is the share price divided by earnings (P/E is a widely-used valuation metric).
But in isolation, valuations are often misleading. Here’s why …
Over the last 10 years, Amazon carried a P/E ratio in the 60-70x range – seemingly overvalued. Yet, in the same time period, its shares gained 810%.
That’s because Amazon’s earnings multiplied 20x over the same period. As earnings grew, those high valuations actually became cheap.
Look at Nvidia. Over the last 5 years its P/E ratio ranged 50-80x. Expensive in the widely believed sense.
Yet Nvidia’s share price exploded 1400%. All because its earnings multiplied by 25x, or 90% pa.
In the Oscar Wilde sense, the common mistake is focusing on the P (or P/E). Instead, we should focus on the E.
The Market …
Right now, Ai is powering earnings growth across the board. In 2025 market earnings are expected to grow by 10%, accelerating to 14% in 2026.
Stocks are gaining to reflect this and valuations have risen to above-average levels. The forward P/E of the S&P500 index is around 24x.
If market earnings double in 5 years, that P/E ratio becomes 12x on a 5-year forward basis. If you think that sounds ambitious, know that market earnings more than doubled in the last 5 years.
What could disrupt things?
Two things:
- If the Ai transformation we are experiencing disappoints, we’d see downgrades in earnings expectations. Impacting stock prices.
- If the economy slows down, causing a recession (or the threat of one), market valuations would contract.
With above-average valuations the above could have a meaningful impact.
Threat or Opportunity?
Downturns are rare but always an opportunity.
In the Investment Academy we train our investors to welcome volatility with open arms, knowing that’s always a chance to capitalise.
We do this with pound-cost-averaging and other ways to compound our wealth passively, in a diversified way with minimal fees and taxes.
Where diversified means not just buying the S&P500, but having smarter and better performing alternatives.
And not forgetting income strategies.
Above all, we learn to think like smart investors with full clarity on what we’re doing.
Always Remember:
- Time in the Markets always beats timing the markets
- Stay Diversified
- Minimise those leakages: Fees, Inflation, and Taxes
- Financial Markets are a great source of recurring income
- ETFs, Balanced Funds and Options achieve all the above
- Being educated helps you outperform 99% of the population
… to ensure your investments work for YOUR financial freedom (not someone else’s)
And …
For more guidance, our Investment Academy will help you implement all of this in a step-by-step way.
Thousands of people have learnt how to diversify and pound-cost-average into low-cost, set-and-forget ETFs & Funds for inflation-beating growth. And Options to create recurring income.
Click here to learn about our Investment Academy
Finally …
– Don’t take the above as advice as it may not apply to you personally
– Your Capital is at Risk
– You may not be covered by the FSCS
– Anything mentioned in a podcast or in a previous article was valid at that time and may not continue to be now |
