To The Moon

The value of a company = the present value of the company + future earnings potential. Besides looking at the individual stock market, another aspect is to look at the market valuation in general, this is because no matter the company, it is very difficult to break a industry trend in the equity market; It might differ iif you are in other markets where you can have more foresightin this case we can use th

Price to Earnings (P/E) ratio = Market capitalization / Net profit. The P/E ratio analyzes a company from the perspective of its earnings. The lower the P/E ratio, the shorter the payback period, and thus, the more valuable the investment.

Price to Book (P/B) ratio = Market capitalization / Net assets. The P/B ratio analyzes a company from the perspective of its net assets. The lower the P/B ratio, the lower the price, and thus, the greater the investment value.

How to use the S&P 500 and the Dow Jones Industrial Average's valuations to judge the timing of entry?

Rule of thumb 

When either the S&P 500 or Dow Jones's P/E and P/B ratios simultaneously satisfy the following conditions:

The P/E ratio is within 0-50% of the range of the value over the past 10 years.

The P/B ratio is within 0-20% of the range of the value over the past 10 years.

We can consider the S&P 500 or Dow Jones to be undervalued, and it may be a good time to enter the market for investment.

Three possible scenarios for entering the market:

If the S&P 500's P/E and P/B ratios both satisfy the conditions, but the Dow Jones does not.

If the Dow Jones's P/E and P/B ratios both satisfy the conditions, but the S&P 500 does not.

If both the S&P 500 and Dow Jones's P/E and P/B ratios satisfy the conditions.

Analysis

Year P/E Ratio P/B Ratio

2013 13.6 2.3

2014 12.8 2.2

2015 15.0 2.4

2016 16.5 2.6

2017 19.6 2.9

2018 25.0 3.5

2019 18.6 2.8

2020 19.2 2.9

2021 24.3 3.4

2022 22.0 3.2

Nasdaq

Year P/E Ratio P/B Ratio

2013 18.2 4.2

2014 16.4 3.9

2015 18.3 4.2

2016 19.9 4.5

2017 23.8 5.1

2018 30.7 6.1

2019 23.4 5.0

2020 24.8 5.2

2021 33.3 6.5

2022 28.2 5.6

As you can see, the P/E and P/B ratios of the Dow Jones and Nasdaq have been trending upwards in recent years. This is due to a number of factors, including low interest rates, strong economic growth, and rising corporate earnings. However, it is important to note that P/E and P/B ratios are just one measure of a stock's value, and they should not be used in isolation. Other factors, such as a company's growth prospects and competitive landscape, should also be considered before making an investment decision.

Current Status: 

As of May 31, 2023, the current P/E ratio of the Dow Jones is 22.02, and the current P/B ratio is 3.2.  It is on the high sign but still within range