The truth about valuing stocks is that so much more is happening in subtext and behind the scenes. As we enter 2016, then, it’s worth looking deeper at what matters and what is overlooked when it comes to market valuation.

In a word, context matters most when we talk about valuation.

It should go without saying that even the most popular valuation measures are just data points in a vacuum. But we seem to have lost sight of that amid unscrupulous salesmen masquerading as “experts,” claiming the stock market is “about 80% overvalued.”

In 2016, don't let volatile markets cloud your financial plans

Let’s look at McDonald’s Corp. MCD, -0.99% as a case study in how complicated and nuanced the market really is.

On the surface, I suppose 26 times earnings is indeed a bit rich for a restaurant stock that saw little profit expansion in 2015 and is actually seeing a declining top line. But forward estimates show McDonald’s shares trade at around 22 times next year’s profits — more in line with what some would call “normal.”

Of course, bears may note that sales are projected to drop next year even if profits edge up — to which bulls might respond that an impressive return on equity of more than 40% means McDonald’s can do plenty even with top-line troubles.

And besides, there’s news — namely, the all-day breakfast introduced at the beginning of the fourth quarter that will probably boost performance and lead to a nice earnings surprise. Of course, longer-term this may not be a good thing, as franchisees are already in revolt over a complicated menu and other uncomfortable corporate mandates as of late.

And so it goes, with analysis and rebuttals and speculation.

Nobody said investing was easy.

Oddly enough, however, many of the same investors who pride themselves on knowing how to read a 10-Q are refusing to do the research these days. They simply throw up their hands and say “because of valuation.”

Overlooking the future

The odd thing about many valuations is that they are based on projections of sales and earnings — and therefore are inherently flawed.

For instance, is it any wonder that oil mega-caps Exxon Mobil Corp. XOM, -0.02% and Chevron Corp. CVX, +0.29% trade at 20 times next year’s earnings? That’s because there are two ways for a high P/E at Exxon to resolve itself: either earnings come in better-than-expected to justify the current premium on its stock price, or earnings come in below targets to prove the current share price is not that out of whack after all.

What do you think is going to happen to Exxon, given these choices and the current state of oil prices?

Of course, as shocking as it may seem, Wall Street can and does occasionally offer proper guidance. That makes it all the more maddening to interpret whether forward estimates are too high or too low.

Beyond the factors that will alter the trajectory of an individual company are big-picture trends that affect sectors and asset classes.

Digging deeper into crashing crude oil prices, look at the dramatic selloff across the MLP space. Sure, it’s about oil just like Exxon, but it’s also about broader forces including the quest for yield as income-seeking investors have few alternatives.

A year ago, these master limited partnerships were hanging tough as a “safe” place to find yield, even as crude oil crashed from the mid-$90s to the mid-$50s at the end of 2014. The fact that oil has soured again surely has punished MLPs, but an equally compelling reason is the end of ZIRP as the Fed looks to “normalize” interest rates and investors may start to seek income in less-risky places. At the same time, the brutalized junk bond market ironically has made distressed “high-yield” offers more favorable to some fixed-income managers because they think they are finally being adequately compensated for risk.

And so it goes: News breaks, data is digested, and investors react. Some might be right, others might be too emotional — or just too early — to profit.

Valuation metrics surely play into these moves. But they are frequently the tail of the dog, with traders willing to pay a theoretical premium or afraid to buy at a theoretical discount based on their bigger-picture views of the future.

In other words, if valuation is driving your views of the future, instead of the future driving your views on valuation, you’re doing it wrong.