What is the Standard & Poor's 500's P-E ratio?
— -- Q: Can you update me on how to find the Standard & Poor's 500's P-E ratio?
A: Market strategists and other experts love to talk about how the stock market is either "cheap" or "expensive."
When you hear those words, though, you should pause and check the facts. There are many ways to measure the relative value of stocks. But perhaps the most widely accepted and easiest to understand measure is the price-to-earnings ratio, or P-E.
The P-E is simply how much investors are paying for every dollar in earnings generated by companies. The higher the P-E, the more expensive stocks are. The P-E is simply the price of the investment dividends by the earnings.
P-Es are usually looked at for individual stocks. But investors can get a P-E for the whole market, too.
There are many ways to measure the market's P-E. Usually investors compare current stock prices to what companies are expected to earn in the current year. Clearly, there's a risk to this. Estimates for future earnings may be overly rosy. If the earnings forecasts are too optimistic, the stock market will appear to be cheaper than it really is.
With that in mind, the best way to calculate the stock market's P-E is to get the 2012 expected earnings from Standard & Poor's website.
Click on the plus sign to the left of "S&P 500 Monthly Performance Data" and scroll down to where it says "S&P 500 Earnings and Estimates."
Next, open the spreadsheet and add together the quarterly earnings for the entire current year. For 2011, at press time, expected annual earnings is $97.98. Divide that $97.98 into the S&P 500's level, which is 1099.23, and you get a P-E of 11.2, which is well below the recent average.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
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