Why stocks aren't as expensive as they appear; Visiting my parents in New Hampshire
Every day it seems, I see another chart showing that some valuation metric is at or near all-time high...
Just consider this scary looking one below from Current Market Valuation. It shows the "Buffett Indicator," which is the ratio of the total U.S. stock market to GDP.
And as you can see, this valuation metric has been surging:
And take a look at the next one from a post on social platform X last week...
It shows that AI-related stocks have been driving both the economy and especially the stock market since the launch of ChatGPT triggered the AI craze nearly three years ago:
This chart recently posted by Creative Planning's Charlie Bilello tells a similar story:
As does this chart – it's from another recent post on X:
But I'm still not persuaded that we're in a bubble and a market crash is likely...
Keep in mind that the economy has been remarkably resilient and large corporations are doing especially well – making historical comparisons less valid.
Take a look at the series of charts from this post on X last week:
And as the post notes:
BoA (Subramanian): Buying stocks at these multiples feels bad, but... perhaps this situation is not untenable – the index has changed significantly from the 80s, 90s and 2000s. Perhaps we should anchor to today's multiples as the new normal rather than expecting mean reversion to a bygone era.
Today's S&P 500 sports a lower debt to equity ratio than prior decades. Moreover, outlays are more predictable given an all but eradication of floating rate debt... companies with high S&P quality ranks make up more than 60% of the index, up from <50% in the 2000s.
Meanwhile, the profit margins of S&P 500 Index companies are at all-time highs – as this Bloomberg chart from another post on X shows:
And while the cyclically adjusted price-to-earnings ("CAPE") ratio (also known as the Shiller P/E ratio) is at its highest level since the dot-com bubble in 2000... if we look at forward rather than trailing 10-year earnings, it tells a different story.
The chart from this post on X at the end of July puts this into context:
In summary, I agree that stocks are expensive – and investors should therefore have modest expectations.
But stocks aren't as expensive as they appear. And I still don't believe we're in bubble territory.
Looking ahead, I'm still "constructive" on stocks overall.
So I'll repeat what I've said many times before: If you own quality stocks or index/mutual funds, stay the course.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. After spending the summer on Lake Sunapee, New Hampshire, my parents are going home to Kenya on Wednesday. So I drove up there on Friday to spend the weekend with them.
The weather was spectacular! It was an astounding 81 degrees yesterday, which we thought might be a record high for that day. But nope – the record is 88 (the average temp is 68 and the record low is 19).
Here are some pictures:
