U.S. Stock Market Extremely Over-Valued

Four charts outlining the extremely high valuation of the stock market in 2024.

The U.S. Stock Markets is Over-Valued and in Bubble Territory

High Concentration – Each time a handful of stocks have approached 40% of the value of the entire market, the stock market has fallen precipitously. Today that concentration is 50%, higher than the Nifty Fifty bubble and the Dot Com bubble.

Largest Stock’s Valuation an Excessive Outlier – A darling will capture the imagination of investors and investors will bid up the value of that stock to excessive heights.  This chart compares the U.S. stock with the largest market capitalization to the 75th percentile (the middle of the top half).  Today’s valuation surpasses 1932 and is more excessive than any prior period.

 

Buffett Indicator - also known as Market Cap to GDP, has gained prominence as a long-term valuation indicator for stocks, largely due to Warren Buffett's endorsement.  In a Fortune Magazine interview back in 2001, Buffett referred to it as "probably the best single measure of where valuations stand at any given moment.  Each time this indicator has approached 2 standard deviations the market has eventually fallen precipitously.  (source: www.currentmarketvaluation.com).

Price to Earnings Model - The P/E ratio is a classic measure of a stock's value indicating how many years of profits (at the current earnings rate) it takes to recoup an investment in the stock. The current S&P500 10-year P/E Ratio is 34.2. This is 68.7% above the modern-era market average of 20.3, putting the current P/E 1.7 standard deviations above the modern-era average. This suggests that the market is Overvalued.  (source: www.currentmarketvaluation.com).

LPL 580178-1

 

DEFINITIONS

Buffett Indicator - also known as Market Cap to GDP, has gained prominence as a long-term valuation indicator for stocks, largely due to Warren Buffett's endorsement.  In a Fortune Magazine interview back in 2001, Buffett referred to it as "probably the best single measure of where valuations stand at any given moment. 

EPS – Earnings per share (EPS) is a figure describing a public company’s profit per outstanding share of stock, calculated on a quarterly or annual basis. EPS is arrived at by taking a company’s quarterly or annual net income and dividing by the number of its shares of stock outstanding.

Price/Earnings Model - The P/E ratio is a classic measure of a stock's value indicating how many years of profits (at the current earnings rate) it takes to recoup an investment in the stock.  The higher the number the greater the risk that an investor is over paying for earnings, expectations are too high, and the investor is speculating that everything in the future will work out perfectly.

Price-to-Earnings Ratio - The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

S&P 500 Index - The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.  The index is a capitalization weighted index of the 500 large companies listed on various stock exchanges (such as the NYSE or NASDAQ).  The S&P 500 was developed and continues to be maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global.  The S&P 500 differs from the Dow Jones Industrial Average and the NASDAQ Composite index, because of its diverse constituency and weighting methodology. It is one of the most followed equity indices, and many consider it one of the best representations of the U.S. stock market.

 

IMPORTANT DISCLOSURES

This correspondence expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein and may be subject to change without notice.  Neither Highcroft Investment Advisors, Gerald Asplund, nor LPL Financial, has no duty or obligation to update the information contained herein. 

The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security.  This memorandum is being made available for educational purposes only and should not be used for any other purpose.

Some of the statements may be regarded as forward-looking statements. Forward-looking statements are, by their nature, subject to uncertainty.  Forward-looking statements may include assumptions relating to future investment and economic scenarios.  When used herein, the words “anticipate”, “believe”, “could”, “estimate”, “expect”, “going forward”, “intend”, “may”, “ought to”, “plan”, “project”, “seek”, “should”, “will”, “would” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect an opinion relating to future events and are not a guarantee of future performance or developments. Reliance on any forward-looking statements involves known and unknown risks and uncertainties. Actual results and events may differ materially from information contained in the forward-looking statements as a result of a number of factors.   Accordingly, you should be prudent with your reliance on any forward-looking information or statements.

Investing involves risks including possible loss of principal.  Past performance does not guarantee future results.  Any investment or investment strategy outlined herein are not suitable for all investors, readers should conduct their own review and exercise judgment prior to investing.  Wherever there is the potential for profit there is also the possibility of loss.  No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.  International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.  The fast price swings in commodities and currencies can result in significant volatility within an investor's holdings.

To the extent you are receiving investment advice from a separately registered independent investment advisor or broker, please note that Highcroft Investment Advisors, Gerald Asplund, and LPL Financial are not an affiliate of and makes no representation with respect to such entity.

Certain information contained herein concerning economic trends, fundamentals, and/or technical analysis, and performance is based on or derived from information provided by independent third-party sources.  The economic forecasts set forth in this material may not develop as predicted. 

Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer.  

The sources from which information has been obtained is assumed to be reliable; the accuracy of such information is not guaranteed and the accuracy and completeness of such information has not been independently verified.

This report, including the information contained herein, has been prepared exclusively for the use of Highcroft Investment Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Highcroft Investment Advisors.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.  Investing in the index would require investors purchase an investment product, which would involve fees and expenses.

 

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