Is the stock market overvalued?
That’s the million dollar question for us investors, isn’t it, but the answer is not quite as easy as some make it seem. There’s a lot of articles touting one answer or another so I wanted to take a deeper dive into a few of the metrics that are often used to judge value and see what they tell me.
It’s easy to look at the graph below taken from here and draw conclusions.
The 32.33 CAPE(Cyclically Adjusted PE Ratio A.K.A. Shiller PE) has only been higher one time in the past decade and maxed out at 44.19 in December of 1999.
That means we still have 30%+ upside so that’s it then – case closed! Just kidding!
One of things that worries a lot of people is that S&P 500 earnings have barely grown in the recent years and the run up has been primarily driven by P/E expansion.
The S&P 500 ended 2011 with a $95.04 per share in earnings and ended 2016 with $96.60 per share in earnings. More recent results are a bit more favorable with the current 12 month GAAP EPS near $105 which finally shows a return to growth. Despite that, the CAPE has expanded as prices outpace earnings growth.
Today’s CAPE is double the mean and median of 16.80 and 16.15 respectively. That doesn’t seem like a good sign and if history is a good metric, can be taken as a sign of poor returns going forward. Unless we see massive earnings expansion then one can expect poor returns if the CAPE has a tendency to revert to the mean in the long run.
The question lies in whether that’s a safe assumption to make and the answer to that is less clear despite how the graph looks. Continue reading “Is the stock market overvalued?”