Stocks extremely expensive: Highest CAPE in the world: Indicator indicates overvaluation of the US stock market | message
Indices in this article
• US-CAPE indicates an extremely overvalued market
• So far, the key figure has only been higher during the dot-com bubble
• Expect a rapid slump in the market?
Valuation metrics currently suggest that US stocks have become extremely expensive. The US stock market is grossly overvalued, as the CAPE shows. The Cyclically Adjusted Price-to-Earnings Ratio, also known as the cyclically adjusted price-earnings ratio, was made famous by the Nobel laureate and finance professor at Yale University Robert Shiller. The Shiller P / E ratio is conceptually similar to the typical P / E ratio, in contrast to this, however, it does not refer to the past 12-month earnings, but to the average of the inflation-adjusted corporate earnings over the past 10 years.
CAPE for US stock market is the highest in the world
“I’m slowly starting to take a critical view of the ever new records for the stock indices. Measured against the Shiller P / E ratio, the valuations are currently at the second-highest level since 1850. The valuation was only higher during the dot-com bubble,” Handelsblatt quotes Werner Krämer, Senior Economic Analyst at Lazard Asset Management. At that time, the CAPE on Wall Street was 44, as Finanzmarktwelt reported.
Meanwhile, Mark Hulbert at MarketWatch points out that the financial world has changed significantly in recent years and decades, which means that the CAPE values can only be compared to a limited extent. Nevertheless, one can compare the current CAPE of the USA with that of other countries. It turns out that the cyclically adjusted price-earnings ratio of the US stock market is currently the highest in the world. For the S&P 500, the value is now 36.6. The US-CAPE is thus significantly more than double the 150-year average of 16.8, explains Wallstreet-Online. This figure therefore points to an extremely overvalued US market. As Barclays has calculated, the average CAPE of the stock markets of 25 industrialized nations is currently 21.4, just over half of the CAPE of the S&P 500, writes MarketWatch. US stocks are currently extremely expensive.
High CAPE leads to high losses
To illustrate the relevance of this key figure, Hulbert took a look at how the stock markets developed during the bursting of the dot-com bubble, depending on their Shiller P / E ratio at the beginning. The expert’s conclusion: lower CAPEs before the internet bubble resulted in lower losses in the subsequent bear market. During the crash on the market in early 2020, there was probably no correlation between the CAPE and the losses, as Hulbert found out. The key figure does not work in every bear market. This is because these lows were caused by the severity of the pandemic and the associated lockdowns, but that does not correlate with whether a stock market is overvalued, emphasizes Hulbert. A high CAPE therefore only leads to high losses if the market is already extremely valued.
Wallstreet-Online also reports that in the past there have always been rapid price setbacks as soon as the Shiller price-earnings ratio exceeded the mark of 30 and held it for a certain period of time. The benchmark index then always collapsed between 20 and 89 percent, it continues. In the past, a major slump was always to be expected when valuations rose as sharply as is currently the case.
In summary, Hulbert states: The CAPE can be extremely helpful in protecting exchanges from a bear market that arises from overvaluation. It remains to be seen whether the US market will see another major slump in the near future.
Finanzen.net editorial team
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