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With the Dow Jones industrial average breaking through 15,000, it's natural to worry that stocks have gone up too far. But higher priced stocks aren't necessarily overpriced. They may still be a good deal if corporate earnings are rising fast, and you think that trend is likely to continue.
A solid April jobs report on Friday is a sign the economy is strengthening. That could lead to higher profits. What's more, many of the traditional threats to bull markets â¿¿ rising inflation and interest rates, a possible recession â¿¿ don't seem likely soon.
That said, stocks are no bargain. Buy them only if you're willing to ride the inevitable ups and downs and hold on for a while.
A look at some forces that could push stocks higher in the coming months:
â¿¿ HIGHER EARNINGS: Stock investors cheered when employers added 165,000 jobs in April and unemployment fell to a four-year low. More people working means more money flowing into the economy. That could help companies extend a remarkable streak of ever-higher profits.
Companies in the Standard and Poor's 500 index posted a record $102.83 earnings per share last year, or 17 percent higher than in 2007, when stocks were last near this level before the financial crisis.
How do stock prices compare with those earnings?
To answer that, experts look at what's called price-earnings ratios, or P/Es. Low P/Es signal that stocks are cheap relative to a company's earnings; high ones signal they are expensive.
P/Es are calculated by dividing the price of each share by annual earnings per share. So a $100 stock of a company that earns $10 per share trades at 10 times. The lower the P/E, the cheaper the stock.
There are various P/Es. Some use past earnings and other future earnings. They give a mixed picture, but together suggest that stocks are reasonably priced.