A Wealth of Common Sense: How Cheap (or Expensive) Is the Stock Market Right Now?
There are plenty of ways to value the stock market as a whole. Investors who look at multiple valuation models can best answer the question as to where stocks are trading.
Yes, there are always some bargains in any market. And there are always some overbought stocks. But knowing the overall valuation provides context. And from that context, investors can get a clue as to the market’s next move.
Looking at historic valuations, one measure is to look at the CAPE. That’s the 10-year earnings of the market. It smooths out corporate valuations compared to the current price-to-earnings ratio (PE) that most investors are familiar with.
By this measure, stocks are slightly overvalued. The current CAPE is just under 30. That’s high compared to 17, based on data going back to the 1870s. However, compared to the period starting in the year 2000 to present, the average is 27. So markets may be overvalued, but only by 10-15 percent.
Other metrics looking at growth versus value stocks tell the same story. Despite the big rally in AI companies, valuations are only at a slight premium to their historic average.
That suggests that any market pullback may be short-term in nature. And that those who fear a drop may be disappointed only get a small one.