The U.S. stock market is a better value today than it was at the bull-market peak in early January 2022.
This is timely information because the stock market is now trading at, or slightly above, the levels it reached then. One of the hoped-for benefits of a bear market is that it will work off the valuation extremes that existed at the end of the immediately preceding bull market, and by so doing creating the valuation foundation that enables stocks to surpass their previous peaks and rise to significant new highs.
From this perspective, the bear market of 2022 gets a barely passing grade. The stock market may be a better value today than at the January 2022 highs, but only in relative terms. Equities today remain more overvalued than at almost any other time in U.S. history.
The table below provides the summary data. For each of nine separate valuation indicators, the table compares the stock market’s current valuation with what prevailed at the bull market high of Jan. 3, 2022. Notice that in all but one case the current stock market is not as overvalued as it was two years ago. The exception is the price/earnings ratio based on trailing-12-months as-reported earnings: It is higher today than it was at the January 2022 market peak.
Investors shouldn’t make too much of the valuation improvement in the case of the other eight indicators, furthermore, since the market in early 2022 was extremely overvalued. Take the Cyclically Adjusted P/E (CAPE) ratio, which is the indicator that shows perhaps the most significant improvement over the last two years — falling to 32.6 from 41.1. Even with that drop, however, the market’s current CAPE ratio is still higher than 90.1% of all monthly readings since 1881, according to data from Yale University’s Robert Shiller.
Another way of putting the CAPE’s improvement in context is to construct a simple econometric model that uses the CAPE ratio to predict the S&P 500’s
SPX
inflation-adjusted return over the subsequent ten years. At the January 2022 high, this model forecast a 10-year real return of minus 2.3% annualized; its comparable forecast today is a gain of 0.7% annualized. While a gain is certainly better than a loss, this projected return is not enough to get too excited about. You can lock in a guaranteed return that is better — 1.7% annualized above inflation — with 10-year TIPS from the U.S. government.
Bear in mind that valuation indicators have relatively little ability to predict the stock market’s short-term gyrations. So even if this column’s analysis is correct and the stock market produces mediocre returns over the next decade, it’s still entirely possible the market could produce decent returns over the next several months or quarters.
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 [email protected]
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