The price to earnings (P/E) ratio is arguably the most popular financial metric because it shows the price of a stock relative to its trailing-12-month earnings. It's straightforward, though sometimes inaccurate when dealing with a small company, or when a one-time windfall or impairment charge makes a stock more or less expensive.

However, the P/E ratio of the S&P 500 is an excellent barometer of the stock market's valuation, because it considers the earnings of all S&P 500 companies. The current S&P 500 ratio is 27 -- around the highest the market has traded in 15 years if you factor out the COVID-19-induced spike, which occurred because earnings temporarily plummeted for many companies.

Value-oriented investors will look at the market's valuation and want to run for the exits. But the market is forward-looking. And right now, it sees a lot of growth potential through a resilient overall economy powered by lower interest rates, lower inflation, and the long-term impact of artificial intelligence (AI).

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Source Fool.com