Mark Hulbert: The stock market is overvalued, according to almost every measure dating to 1950

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The stock market has been a gambler’s paradise this year. (Getty Images)

The stock market is hugely overvalued when judged against almost any historical standard.

That’s the conclusion that jumps out from the accompanying table, which reports the latest readings from eight stock market valuation indicators that have stood the test of time. The table also compares each indicator’s latest readings with those from a month ago, from the beginning of the year and relative to the past 20, 50 and 70 years.

I will be updating this table each month in this column, using the same methodology to calculate the values so you can be assured that apples will be compared only with apples.

The eight indicators that will be featured are:

  • The S&P 500’s SPX, -1.21% price-to-earnings ratio. I will calculate this ratio using earnings per share in the as-reported trailing four quarters. Though that overlooks analyst estimates of corporate earnings over the subsequent 12 months, it is only by focusing on trailing EPS that I create a like-for-like comparison with historical data. (Read this column for a further discussion of how there is little consistency on Wall Street in how P/E ratios are calculated.)
  • The Cyclically-Adjusted Price/Earnings Ratio (CAPE). This ratio, made famous by Yale University professor (and Nobel laureate) Robert Shiller, is similar to the traditional P/E except that the denominator of the ratio is average inflation-adjusted EPS over the trailing 10 years.
  • The Total Return CAPE. This is similar to the better-known version of the CAPE, except that dividends are taken into account in the calculation.
  • The S&P 500’s dividend yield. The value I report each month will be calculated based on S&P 500 dividends actually paid over the trailing 12 months, as a percentage of the latest value for the index itself.
  • The S&P 500’s price-to-sales ratio. The latest value of the S&P 500 index divided by trailing four quarter sales per share.
  • The S&P 500’s price/book ratio. The latest value of the S&P 500 index divided by the index’s most recently reported book value per share.
  • The Q-ratio. This indicator was introduced many decades ago by the late James Tobin, the 1981 Nobel laureate. The value I report each month will be calculated by dividing the total market cap of publicly traded U.S. companies by the replacement cost of corporate assets.
  • The market cap/GDP ratio (otherwise known as the Buffett Indicator). I will calculate each month’s reading by dividing the total market cap of all publicly traded companies by the latest government estimate of GDP. For example, the value for this indicator that I report in the table is based on the initial estimate of third-quarter GDP, which was just released on Oct. 29.

This table shows how valuation ratios have increased this year, along with their percentiles rankings for three time periods in the three right-most columns. To see all of the data, scroll the table by clicking inside it and dragging back and forth.

To illustrate what the data in the table signify, take the P/E ratio in the top row. Its latest value is down slightly over the past month (to 33.4 from 33.9 ), but markedly higher than at the beginning of the year. The right-most three rows report where the latest P/E reading stands as a percentile of the historical distribution since 2000, 1970 and 1950. Notice that the current P/E is at the 88th percentile of all readings over the past 20 years, the 95th percentile since 1970 and 96th percentile since 1950.

Note that these indicators are relevant to the stock market’s longer-term prospects; they tell us little about the market’s near-term prospects. My favorite analogy for making this point comes from Ben Inker, head of asset allocation at Boston-based GMO. Likening the market to a leaf in a hurricane, he says “you have no idea where the leaf will be a minute or an hour from now. But eventually gravity will win out, and it will land on the ground.”

I’d be happy to include in the table any shorter-term indicators that have exhibited a statistically significant ability over the decades to forecasting the market’s near-term direction. If you know of any, I will be happy to consider adding them. Please email me any suggestions at the email address below.

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