US Stocks Are Eye-Wateringly Expensive By Pretty Much Every Valuation Metric

US Stocks Are Eye-Wateringly Expensive By Pretty Much Every Valuation Metric
Theodora Lee Joseph, CFA

over 1 year ago1 min

Mentioned in story

The chart above lays out seven popular valuation metrics, and looks at how each of them values the S&P 500 relative to its last 50 years. Take the price-to-earnings ratio as an example: the go-to metric is sitting at around its 58th percentile, meaning the S&P is as expensive as it’s been in 58% of monthly readings since 1972.

That’s by far the least worrying, mind you. All the other metrics suggest the S&P is seriously overvalued compared to its history: it’s in the 85th percentile for the CAPE ratio, 87th for dividend yield, and 95th for the Buffett ratio, which looks at the stock market’s total value relative to the size of the US economy. And it’s within a hair’s breadth of being the most overvalued it’s ever been based on average equity asset allocation, which takes into account the percentage of investors’ portfolios that are allocated to stocks.

Put simply, you’re still paying through the nose for stocks even after stocks have fallen 15% this year. Now, this isn’t to say you should expect another imminent collapse: there's a lot of uncertainty about where stocks go next. But it does suggest you should strike a cautious approach, potentially by taking equal long and short positions to protect your portfolio no matter which direction the market heads. The First Trust Long/Short Equity ETF (ticker: FTLS, expense ratio 1.36%) does that for you, and could be a good place to start.

Data published on May 19th



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