-1

If I have current earnings for the SP500 of $160, should trailing or forward P/E be used to calculate the SP500's price?

What is the difference in using one over the other?

  • One is actual information but it is in the past, the other is looking into the future but it is a guestimate at best with some assumptions many of which can be biased. – Victor Feb 25 '18 at 4:57
  • The price of the S&P, or any stock, is just random; it's simply caused by what someone will pay. Exactly like your neighbor on the corner selling their house. Some theorists have proposed that the "earnings" of a company may have something to do with the price of the stock. This was a cute theory or idea, but means less than nothing. – Fattie Feb 25 '18 at 13:32
  • @Fattie Mostly untrue. Yes, the market decides prices, but "what someone will pay" in the market is often derived from earnings and other fundamental information about a company (dividends, book value, etc.) Only some market participants are fools who ignore fundamentals. – Chris W. Rea Feb 25 '18 at 14:13
  • ""what someone will pay" in the market is often derived from" ... unfortunately we have no way at all of knowing that. (other than perhaps some sort of comprehensive survey; but it wouldn't be clear then even if the answers given were "really" the answers.) "Only some market participants are fools who ignore fundamentals." actually, I'd guess almost certainly the vast, vast majority of trades made are purely based on velocity, sentiment, etc. – Fattie Feb 25 '18 at 14:37
2

The answer depends on what the future price for the Index will be used for.

Trailing Earnings, or Trailing P/E is used as a consistent and quite reliable metric for Index performance relative to its long-term historical trend, and as such, it is the measure to use when a more quantitative metric is required.

Forward Earnings or Forward P/E is a forecast, an educated and informed estimation. As such, it is useful when attempting to asses Risk. However, Forward P/E depends on factors that are generally not under anyone's control, such as future interest rates, future commodity prices, regulatory norms, geo-political forces, etc. As Master Yoda would say: "The future, easy to see it is; but the future is always changing."

For the purposes of investment strategy, both must be used. Historical P/E will be used to ascertain where current Index price is relative to its historical trend, and Forward P/E will be used to ascertain Risk -- at the same time.

1

There is no "answer".

Some traders happen to like to look at the forward P/E.

Some traders happen to like to look at the trailing P/E.

Many traders have utterly no interest in the P/E, and have never looked at it for any reason.

Most basically, your sentence says something like "can I calculate the price using..."

You can't, in any way, "calculate" the price of a stock. It's just what someone happens to pay last in a trade.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.