Market Valuation
Current Valuation Metrics
These metrics help assess whether the overall stock market is overvalued, fairly valued, or undervalued relative to historical norms. All three metrics currently suggest the market is trading significantly above historical averages.
Shiller CAPE Ratio
The Cyclically Adjusted Price-to-Earnings ratio, developed by Nobel laureate Robert Shiller, compares current stock prices to inflation-adjusted earnings averaged over the past 10 years. This smoothing reduces the impact of business cycle fluctuations.
How to Interpret
- Below 15: Historically undervalued, potential buying opportunity
- 15-25: Fair value range based on historical norms
- 25-30: Elevated valuations, proceed with caution
- Above 30: Historically high, suggests overvaluation
Historical Context
- Long-term average: ~17 since 1881
- Peaked at 44 before the 2000 dot-com crash
- Dropped to 13 during the 2009 financial crisis
- Has remained elevated since 2015
Buffett Indicator
Named after Warren Buffett, who called it "probably the best single measure of where valuations stand at any given moment." It compares total U.S. stock market capitalization to GDP.
How to Interpret
- Below 75%: Significantly undervalued
- 75-90%: Modestly undervalued
- 90-115%: Fair value range
- Above 115%: Significantly overvalued
Limitations
- Doesn't account for low interest rates supporting higher valuations
- U.S. companies earn significant revenue internationally
- Corporate profit margins have structurally increased
- Best used as one input among many
Price-to-Sales Ratio
The market-wide price-to-sales ratio compares total market capitalization to total revenue. Unlike P/E ratios, it's harder to manipulate through accounting practices since revenue is more straightforward than earnings.
How to Interpret
- Below 1.5: Historically attractive valuations
- 1.5-2.0: Fair value based on historical norms
- 2.0-2.5: Elevated, suggests caution
- Above 2.5: Historically high valuations
Why It Matters
- Revenue is harder to manipulate than earnings
- Works for unprofitable growth companies
- Less affected by one-time charges or gains
- Useful cross-sector comparison tool
Important Considerations
- High valuations don't predict timing - markets can stay expensive for years
- Low interest rates can justify higher valuations
- These metrics are better for long-term (5-10 year) return expectations
- Sector composition changes over time affect aggregate metrics
- Use valuation data to inform position sizing, not market timing
For detailed charts and technical analysis, we recommend TradingView.