The stock market is at record highs — and it's gotten cheaper 🤔

Earnings can catch up faster than a bearish market call can come true

The S&P 500 closed at a record high on Monday. And yet there’s a very good case to be made that the S&P has been getting cheaper as prices have climbed.

I’ll explain.

First, some basics on valuation

One of the most popular ways of measuring value in the stock market is the price-to-earnings (P/E) ratio.

There are a couple of different types of P/Es, and they offer different kinds of information. One you’ll often see is the forward P/E on the S&P 500, which is calculated by taking the S&P 500’s current level and dividing it by the expected next-12 months’ earnings of those underlying S&P 500 companies.

If the forward P/E on the stock market is above some long-term average, then the stock market is considered expensive. If it’s below average, then the market is considered cheap.

Because of this, one of the most popular arguments for staying out of the stock market is that the forward P/E is high.

BUT that argument is faulty.

Stocks can get cheaper while rising