The stock market is no more overvalued today than it was at the beginning of the year.
That doesn't mean the stock market isn't overvalued - just that it hasn't become more overvalued since the end of last year.
Many of my clients are surprised to discover this, since the widespread perception is that the market since January has risen into even higher nosebleed levels. What actually seems to have changed is the number of analysts declaring that we're in a bubble.
Consider: Corporate earnings this year have grown faster than the market itself. In contrast to the S&P 500's SPX 9.9% year-to-date gain, the index's trailing 12 months' earnings per share have risen 10.4%. In other words, all of the stock market's year-to-date gain is supported by higher earnings.
Line graph showing the frequency of searches for "Bubble" in the Finance category over 13 weeks.
As a result, the stock market's price/earnings ratio has slightly declined since January.
If a bubble is the market getting further and further out in front of earnings, we're no more in a bubble today than at the beginning of the year. Yet over this same eight-month period, the frequency of bubble searches on Google has nearly doubled, as you can see from the accompanying chart.
This discussion points to the subjective dimension of bubble predictions, which is only loosely correlated with objective dimension of overvaluation. For largely inscrutable reasons, there are times - like now - when analysts are more inclined to declare that a bubble is forming. Ironically, from a contrarian point of view, a big increase in predictions that a bubble is about to burst actually makes it less likely that one will.
Status of valuation indicators
None of this discussion is to deny that the stock market remains extremely overvalued, as you can see from the table below. It lists 10 valuation indicators with good track records when predicting the stock market's subsequent return. Most of them are at or close to being the most bearish they've been in U.S. history.
It's nevertheless valuable to know about the nonobjective, psychological dimension of bubble predictions. The time to most worry about a bubble bursting is when the market is objectively overvalued and the existence of a possible bubble is not on investors' radar screens.
