Stock Valuations Have Fallen, Sure, But They’re Still Awfully High

Stock Valuations Have Fallen, Sure, But They’re Still Awfully High
Stéphane Renevier, CFA

over 1 year ago1 min

Everyone has their favorite metric for valuing a stock, but almost all of them say the same thing right now: stocks are eye-wateringly expensive, even after this year’s selloff. Only the free cash flow yield measures valuations at about the historical average. But according to cash flow yield, cyclically adjusted price to earnings, and forward price to earnings, stocks are “overvalued”, in this case more expensive than they have been between 77% and 87% of the time. And according to everything else, they’re pricier than they’ve been about 90% of the time.

Now, investors tend not to care too much about valuations in the short term, and a rally in stocks could easily push them even higher. But they do tend to matter over the long term, because over time, prices tend to converge to their “fair value”. So the more money you pay above fair value (what these valuation metrics are trying to capture), the lower you can expect your returns to be. That means today you should probably expect lower returns than you historically would have seen…

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