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Multiples (the quick way)

A multiple like P/E or EV/EBITDA tells you what the market pays per unit of profit. Compare a company to its own history and to peers. A low multiple isn't automatically 'cheap' — it may reflect real risk; a high one isn't automatically 'expensive' — it may reflect real growth. The question is always: is the multiple justified by the fundamentals?

DCF (the thorough way)

A discounted cash flow values a business as the sum of all the cash it will ever generate, discounted back to today (because money now is worth more than money later). In practice: forecast free cash flow for ~5–10 years, estimate a terminal value for everything after, discount it all at a rate reflecting risk. It's only as good as its assumptions — small changes to growth or the discount rate swing the answer a lot, so test a range.

Which to use

Multiples are fast and great for comparison; DCF forces you to be explicit about growth and risk. Strong analysts triangulate — if a cheap multiple and a DCF both point the same way, conviction rises. When they conflict, you've found something worth understanding.

Interest rates (the Fed funds rate)

The central bank's key interest rate is the price of borrowing money for the whole economy. Low rates make loans and mortgages cheap, which encourages spending, investment, and risk-taking — generally a tailwind for share prices (especially fast-growing companies whose value sits far in the future). High rates do the reverse: borrowing costs rise, consumers and companies pull back, and future profits get discounted harder, which pressures valuations. Rates are the single most important number in macro because almost everything else is priced relative to them.

In practice: A 0.25% rate is very low — near 'free money', supportive of stocks and consumer spending. A rate rising through 4–5% is restrictive — it cools spending, raises the bar for every investment, and tends to weigh on richly-valued shares. The direction (rising vs. falling) usually matters more than the level.

The yield curve

The yield curve plots the interest rate on government bonds across time — 2-year, 10-year, 30-year. Normally longer bonds pay more (you're locking money away longer). The shape is a widely-watched signal: a steep upward curve suggests investors expect healthy growth; a flat or downward-sloping ('inverted') curve — where short-term rates are HIGHER than long-term — has historically preceded recessions, because it implies markets expect the central bank to cut rates soon to rescue a slowing economy.

In practice: If the 2-year yield is above the 10-year (an 'inverted' curve), the bond market is flagging recession risk — a caution signal for cyclical and highly-leveraged companies. A steep, upward curve is the market voting for growth.

Inflation (CPI)

Inflation is the rate at which prices rise, usually measured by the Consumer Price Index (CPI). A little inflation (~2%) is healthy — it's what central banks target. Too much erodes consumers' spending power and forces the central bank to raise interest rates to cool the economy, which pressures stocks. Too little (or falling prices — deflation) can signal weak demand. Inflation also hits companies differently: those with 'pricing power' can pass higher costs on to customers; those without see margins squeezed.

In practice: CPI around 2% is the comfortable target. CPI at 7–9% is a red flag — it usually forces aggressive rate hikes, hurts consumer-facing businesses, and rewards companies with strong pricing power. CPI near 0% can signal a demand problem.