The U.S. stock market’s valuation is approaching the lofty levels seen at the bull market top in early 2022. That’s the unmistakable message of my monthly review of eight valuation models that have superior track records forecasting the U.S. market’s subsequent returns.
Though the theoretical approaches represented by the eight are distinct, they nevertheless tell a similar story about the U.S. market right now.
This wide range of theoretical approaches is crucial, because it’s possible to find fault with any of the indicators individually. Using price/book and q-ratios, for example, suffesr from the inadequate GAAP accounting of intangible assets. Looking at the dividend yield doesn’t reflect the growing preference of corporations to return cash to shareholders via share repurchases rather than dividends. And so on.
To wriggle out from underneath the bearish message of all eight indicators, however, the bulls would have to show that each of those indicators is defective. While that’s always possible, it’s a much more difficult argument to make — and far less plausible.
The chart below compares the S&P 500’s
SPX,
+0.06%
current valuation with what prevailed at the bull market’s top in early January 2022. The columns in the chart report the percentage of past months in which valuations were lower, so higher columns indicate higher relative valuations.
Regardless of whether the comparison period extends back to 2000, or 1970 or 1950, the message is the same: U.S. stocks currently are almost as overvalued as they were at the top of the bull market.
That’s discouraging, since bear markets are supposed to reduce valuations by enough that the next bull market rests on a more solid foundation — and so has further to run to the upside than the previous one. But this most recent bear market was different; we’re not even back to where the bull market stood at its early-2022 top, and yet today’s S&P 500 valuation is nearly as stretched.
How valuation models stack up
Perhaps the only solace the bulls can find among these valuation indicators is that they tell us little about the market’s short-term direction. Valuation’s predictive ability exists at a much longer horizon — five to 10 years, in fact. So it’s entirely possible that stocks in coming months can continue rising despite market overvaluation. But if they do, the S&P 500 will be resting on an even flimsier foundation than it is already.
| Latest | Month ago | Beginning of year | Percentile since 2000 (100% most bearish) | Percentile since 1970 (100% most bearish) | Percentile since 1950 (100% most bearish) | |
| P/E ratio | 25.69 | 24.95 | 22.23 | 76% | 84% | 89% |
| CAPE ratio | 31.69 | 30.79 | 28.32 | 88% | 88% | 92% |
| P/Dividend ratio | 1.50% | 1.53% | 1.74% | 88% | 90% | 93% |
| P/Sales ratio | 2.56 | 2.49 | 2.19 | 92% | 97% | 97% |
| P/Book ratio | 4.38 | 4.26 | 3.75 | 96% | 94% | 96% |
| Q ratio | 1.89 | 1.83 | 1.58 | 97% | 99% | 99% |
| Buffett ratio (Market cap/GDP ) | 1.74 | 1.67 | 1.46 | 93% | 97% | 98% |
| Average household equity allocation | 46.2% | 44.9% | 44.9% | 92% | 92% | 94% |
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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