This critical variable is key to long-term stock price

Dear Reader, Stock prices have been falling since the beginning of the year. The S&P 500 is down 18% from its January 3, 2022, closing high of 4,796. However, stock valuations — as measured by the forward price-to-earnings (P/E) ratio — have been falling since August 28, 2020. For investors thinking about trading based on value, it’s imperative to remember stock prices don’t have to fall for valuations to fall. This is especially the case when earnings are growing, and earnings have been trending higher for decades. The mathematical nuance behind this is pretty basic and straightforward, but it may not be immediately intuitive for some. The idea of falling valuations tends to have a negative connotation, so, understandably, you might default to thinking that prices should fall. This is very relevant right now, especially with many experts arguing that stock market valuations should come down. In the stock market, valuation can be loosely defined as the premium you pay for a company’s earnings. Whether a company is worth $100 million or $10 million doesn’t tell you much. But if a $100 million company and a $10 million company are each earning $1 million a year, then the $100 million company is carrying a higher valuation than the $10 million company. The simplest way of measuring value in the stock market is the price-to-earnings, or P/E, ratio. The big picture here is that you can never rule out the possibility that economic conditions deteriorate significantly, bringing earnings and stock prices significantly lower. But strictly from the perspective of valuations, it’s important to remember that falling stock prices are not a condition of falling valuations. The critical variable is earnings, which we know are the most important long-term driver of stock prices. Data from Deutsche Bank shows earnings have been trending higher for 85 years. In recent years, thanks to the COVID-19 pandemic, we’ve learned just how resilient and adaptable companies can be in their efforts to preserve earnings growth. As long as earnings are expected to grow over time, you should expect stock prices to eventually follow. [image] Andrew Graham Editor, Silver Ridge Market Report P.S. Every time Bitcoin surges, people panic to buy. Every time it plunges, people panic to sell. But none of these ups and downs seem to affect folks who attend our upcoming [DeFi MasterClass.]( I'm pretty certain that by the end of [this presentation](, you'll be better informed about DeFi and the massive opportunities it presents than practically anyone you know. [Join us for this one-of-a-kind DeFi MasterClass.]( 316 Media and Silver Ridge Market Report, is not giving individualized financial advice. Never invest more than you are willing to lose. 316 Media or Silver Ridge Market Report is not giving financial, investment, or stock advice. Our content is designed for generalized informational purposes only. If you have specific questions about investments or stocks you should consult a financial advisor. Articles, News, Or Other published materials are not always the views of 316 Media and/or Silver Ridge Market Report. If you feel you are receiving these emails in error please email Support@SilverRidgePro.com or click the unsubscribe button below. [Unsubscribe]( Silver Ridge Media 30 N Gould St, Ste R Ste R Sheridan, Wyoming 82801 United States