The S & P 500 trades at just 21 times expected earnings over the next 12 months, a forward price-earnings ratio that looks quite reasonable considering the benchmark’s trailing P/E is currently 28. It doesn’t mean stocks are cheap, experts warned. The spread between the two P/E ratios is rarely this wide except at market extremes like back in 2000, FactSet data shows. It’s a sign that investors are really expecting a parabolic move in earnings in the coming year and any shortfall could cause a market pullback. We’ll get a clearer idea of whether companies can live up to these big profit expectations when second-quarter earnings reporting season kicks off next week. Companies are likely to give forward guidance with those results. What the spread shows: Stocks aren’t cheap The valuation spread matters because it shows how much of the market’s valuation case is tied to future earnings growth. “The numerator in both your P/E ratios is the same, boiling down the difference to that between LTM and NTM earnings,” Aswath Damodaran, professor of finance at NYU Stern, said in an email to CNBC. LTM refers to earnings over the last 12 months, while NTM refers to expected earnings over the next 12 months. The spread itself may not be the warning. The bigger question is whether Wall Street’s earnings forecas …
