Fundamental analysis, as an investment tool, states that the price of any financial asset is the present value (PV) of expected cash flows. In regard to equities (stocks), that would be a firm's earnings. Higher the firm's earnings should result in higher price for the firm's stock. Well, there is definitely a disconnect between a firms earnings and its price. (See the following chart.) Since the 2007 peak in EBITDA (earnings before interest, taxes, depreciation, and amortization), the S&P 500's EBITDA has fallen 7%, but the S&P 500 has risen 15%. Therefore, from the perspective of a value investor, who uses fundamental analysis, this market, as measured by the S&P 500, is not cheap. Why the dichotomy? Look no further than the Fed's QE policies, which has created this monster equity bubble.
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