See important Research Disclaimer.
The ASX 200 is at an increasingly precarious point in valuation terms. Its forward price-to-earnings ratio is at a level that has often in the past resulted in sharp corrections. Earnings per share (EPS) estimates are incredibly negative, possibly overly so. This means that either earnings estimates begin to improve or prices collapse.
This contradiction largely boils down to commodity price forecasts and their weight in longer-term stock valuations for this commodities-heavy index. The most 'stretched' valuations are in commodity-related sectors, but there is a perfectly valid case to argue that commodity prices will be higher in 12 months or more.
The future price-to-earnings (P/E) ratio can tell traders if the valuation of the ASX 200 is 'expensive' or 'cheap' relative to its long-run average. The current valuation levels in the ASX are at historical warning levels, and historical precedent tells us that these levels are often subject to a reversal.