There is almost as much wealth in the U.S. stock market today as there was on January 3, 2022, when it was at its highest point.
When the market comes back from a correction (or worse) and hits a new all-time high, it’s important to compare the present value to what it was at previous market peaks. Investors can hope that the pullback, also known as a bear market, will have gotten rid of some of the market’s overreactions and set the stage for a big new leg of the bull market.
Look at the chart below to see that the S&P 500 SPX -0.32% isn’t going through that right now. It shows where each of a group of valuation measures stands in relation to the way its monthly returns have been spread out since 2000. If it reads 100%, it means it’s more bearish than ever, and if it reads 0%, it means it’s most positive.
The chart shows that all of these signs are very close to the bearish end of the range. In fact, they are all almost as bearish as they were at the market peak in January 2022, if not more so.
This doesn’t mean that the stock market will not keep going up SPX -0.32% DJIA 0.16% COMP -0.85%. It will be even harder to buy and sell stocks than it was before the weak market in 2022, though.
Another reason why overvaluation doesn’t instantly ruin the market is that valuation isn’t very good at predicting what will happen in the short term. But each of the chart’s markers has a great track record of predicting the return of the stock market over the next ten years. As I said a month ago, they expect gains that are less than inflation from now until 2034.
How the methods used for valuation now differ from those used in the past
The percentiles shown in the above chart are based on how monthly results have been spread out over a short time in U.S. market history—since 2000. Some experts say that the last few decades don’t have much to do with the market today, which is why I focused on this shorter time frame. The stock market is still way too expensive, even if we accept their case, which I don’t.
It looks like the stock market is even more expensive if we look back further than the last 20 years. The following graph shows, for each measure, the percentile that its current reading falls in relation to all monthly readings from 1970 and 1950.
There is no doubt that the stock market is way too expensive right now.
