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      12-26-2018, 10:39 PM   #52
First Lieutenant

Drives: E46 M3, E90 M3
Join Date: Jun 2007
Location: Los Angels, Ca.

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It appears that investors are using an average S&P PE ratio of 14.5 as a reference to price the stock market. Based on what they are saying, assuming a worse case scenario that 2019 earning is flat, with 14.5 as the reference, the S&P should be around 2350.

A couple of things one should be careful:
1. I don't know if 14.5 is market cap weighted. For example, if you have two companies: one is a small cap at around 50b., and the other is AMZN which is around 700b. If you do a simple average then the PE ratio is simple the average of the two companies. But if you calculate using market cap weighted, then the PE ratio is more or less that of AMZN. And since AMZN PE is way up there then the S&P overall ratio is not cheap.

2. As I mentioned above with the recent corporate tax rate from 35% t 21%, it creates a distortion in our usual 14.5 PE ratio reference. So with the same exact quarterly earning, since the the tax rate is 21%, the PE ratio will be a lot lower because your earning per share will be higher. So instead of using 14.5 as your reference, with 21% tax rate, that average PE should be a lot lower.

3. Also the recent corporate tax cut is not permanent which expires in 5 years (I think), once the rate goes back up to 35%, the PE will be a lot higher so stock will become a lot more expensive. So investors have to watch out for it.

Having said all that, with a few exceptions, stocks are still kind of expensive, and if we have a flat earning in 2019, it's hard to put a PE ration on them.