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).
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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.
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