How overvalued are US stocks?

Courtesy of Andrew Smithers via FTAlphaville, a simple table gives you a take on where S&P500 overvaluation currently sits:


The CAPE measure is described elsewhere by Barry Ritholz:


CAPE looks at the prior 10 years of trailing earnings. It smooths out any given quarters’ ups and downs, and theoretically includes a full business cycle. The way Shiller intended it to be used was to create a valuation metric that would suggest whether stocks are likely to outperform their average returns over the next 10 years.

The “q” is ‘Tobin’s q” which  is the ratio between the market value and replacement value of the same physical asset. Here it is over the long term:


That’s expensive. But it can always get more so!

Houses and Holes
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  1. Hussman writes weekly on valuation. He has been a wrong bear for a couple of years, but his analysis is well worth reading. His two principle concerns seem to be a hsitorically high profit share and low predicted 10 year returns based on historically accurate models (as opposed to so many models that are shown not to have reliable predictive capacity).

  2. US economy has a massive competitive advantage with its low cost energy.

    How would this impact the S&P 500 valuations?

    Notice in last weeks that European politicians have gone into a full blown panic mode, as their big corporates are telling them they must get energy prices down.

    Looks like Europe’s hair-shirt green subsidies will all be reversed in the coming months.

  3. Recently there has been some spirited debate around the shortcomings of CAPE as a valuation measure (e.g. the effect of accounting changes such as goodwill write-downs, etc.) but my personal view is that is has a remarkable track record across time of predicting LONG TERM returns – and certainly by any respectable measure (such as Tobin’s Q, Market Cap to GNP as mentioned above and also plain on trend regression) the US market is significantly overvalued now and returns on US equities over the next 10 years are going to be poor.

    The biggest driver of the CAPE being so high is the fact that corporate profits as a % of GDP are at pretty much an all time high, thanks to cheap debt and low taxes and wages. But profits as a % of GDP throughout history are always strongly mean reverting. When that happens, look out below.