market cap ÷ profit
where market cap is the total market capitalisation of all companies in the sector or market and
profit is the total bottom line profit of all companies in the sector or market.
Sector PE is used to compare a company to its sector, a company to market as a whole or a particular sector to the market.
A market PE is a sector PE as above, where the “sector” is an entire market
Market PE may be used as a comparator for a company's PE. A sector PE is usually more suitable.
Market PE is also used as a measure of the value of the market as a whole. A market PE may be compared to:
- another market,
- historical market PEs of the same market,
- returns on other types of securities or the risk free rate.
Like any valuation ratio, a higher market PE may be justified by higher growth. The growth rate of the market may be estimated by aggregating the profit forecasts of large companies, or economic growth forecasts may be used as a proxy. Another way of approaching the question of whether the market is correctly valued is provided by the cyclically adjusted PE