over 2 years ago • 1 min
After inflation, the returns generated by US stocks have dropped to the lowest level since at least 1970 – creating another warning sign that markets might be overvalued.
In real terms – adjusting for rapidly accelerating US inflation – the combination of profits generated and dividends paid to investors for companies in the benchmark S&P 500 index (charted above by research firm SentimenTrader) has tumbled this year.
Examining stocks' so-called earnings yield – the amount of profit generated per dollar of stock market value – or its dividend yield – the level of dividend paid out per dollar of stock market value – are standard ways of quantifying whether the market's currently cheap or expensive. Lower earnings and dividend yields imply a pricier market.
As the chart shows, on this measure of combined earnings-plus-dividend yield, US stocks have never been so expensive. In fact, their valuation just passed the high reached in March 2000, just before the dot-com bubble collapsed.
Even if markets can avoid a crash this time around, such high valuations don’t inspire optimism that investors will get much of a return from US stocks in the next few years.
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