Are Stocks Overvalued?

I typically watch CNBC during my lunch hour. I like to catch the latest Halftime Report, since it often includes guests whose opinions I respect when it comes to the markets.

The big topic du jour is: Are stocks overvalued right now, and therefore is the market about to have another correction?

A number of commentators have recently pointed out how bullishness among investors has accelerated recently, which is a contrary indicator that could spell trouble ahead for stocks.

When bullish investor confidence gets too high, that’s bearish.

The Dow Jones Industrial Average notched another 1,000-point milestone, closing above 28,000 for the first time last week. This recent race to record highs in the Dow, S&P 500 and Nasdaq has more and more folks concerned that stocks have run too far too fast for their own good.

chart

So let’s not speculate here. Instead, let’s take a look at the cold, hard historical data on stock valuations to find out if the market is too expensive.

The graph above charts the S&P 500 forward price-earnings (P/E) ratio, along with several other popular measures of market valuation in the box at upper right.

A P/E ratio is the ratio used for valuing a company that measures its current share price relative to its per share earnings (EPS).

Starting with P/E, you can see right away that stocks are trading at 16.82x earnings right now. That’s not much above the 25-year historical average of 16.22. Taking a closer look at the box, you can also see that price-to-book and the dividend yield of the S&P 500 are likewise just about “average” right now.

The only measure that looks somewhat elevated to me is price-to-cash flow, which is about 15% above average.

Still, that’s not wildly overvalued in my book. 

Plus, if you look at the earnings yield spread (EY), or the difference between the current earnings yield for the S&P and corporate bond yields, stocks appear to be somewhat undervalued right now.

Bottom line: The answer to everyone’s big market question is no and no. Valuation alone is a terrible market timing indicator. That’s because stocks can, and often do, stay overvalued for a long time before leading to a correction.

And as the hard data above show, stocks don’t look all that overpriced to me right now.

Here’s to growing your wealth,

Mike Burnick

Mike Burnick

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Mike Burnick

Mike Burnick is the editor of Mike Burnick’s Wealth Watch, Infinite Income, Amplified Income and Millionaire Moments. Mike has been bringing his trading strategies to the masses for over 30 years. He has been with Seven Figure Publishing since 2017. In 2018, the average return of Infinite Income beat the...

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