Stocks Are Severely Overvalued By Almost Every Predictive Metric

Phoenix Capital Research's picture

The stock market is overvalued by almost every known metric.


The single best predictor of stock market performance is the cyclically adjusted price-to-earnings ratio or CAPE ratio. Most investors price a company based on its current Price to Earnings or P/E ratio. Essentially what you’re doing is comparing the price of the company today to its ability to produce earnings (cash).


However, corporate earnings are heavily influenced by the business cycle.


Typically the US experiences a boom and bust once every ten years or so. As such, companies will naturally have higher P/E’s at some points and lower P/E’s at other. This is based solely on the business cycle and nothing else.


CAPE adjusts for this by measuring the price of stocks against the average of ten years’ worth of earnings, adjusted for inflation. By doing this, it presents you with a clearer, more objective picture of a company’s ability to produce cash in any economic environment.


We have mentioned before that CAPE is the single most important metric for long-term investors. I wasn’t saying that for impact.


Based on a study completed Vanguard, CAPE was the single best metric for measuring future stock returns. Indeed, CAPE outperformed


1.     P/E ratios

2.     Government Debt/ GDP

3.     Dividend yield

4.     The Fed Model,


…and many other metrics used by investors to predict market value.


So what is CAPE telling us today?


The S&P 500 is currently at a CAPE of over 26.





The S&P 500 has only been at this level or higher a handful of times in the last 100 years. All of them have coincided with major market peaks.


This is not to say that the market has definitively topped or is about to Crash; but it does emphasize how overvalued the market is. Indeed, stocks are overvalued by just about every other metric you can imagine.


Warren Buffett’s favorite indicator for stocks (total market cap of stocks to GDP) is currently at its second highest level in 50 years with a reading of 125. The only higher reading the market has ever registered was in 2000 at the absolute peak of the Tech Bubble madness.


Other items that indicate the frothiness of the markets:


1)   We are on track for $2.51 trillion in Mergers and Acquisitions this year. This will be the largest amount since 2007.

2)   The stock market is currently sporting a Price to Sales of 1.7, even higher than it was at the peak of the Housing Bubble.

3)   The average bull market going back to 1921 is 62 months long. This current bull market is now in its 64th month.

4)   The VIX index (a measure of investor complacency or fear) is at an all time low. Investors today are even more complacent than they were in 2007 or 2000.



Suffice to say that of all the assets currently experiencing significant inflation, stocks are the biggest beneficiaries. They have been inflated to the point of being totally disconnected from reality.


This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at


This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.


Best Regards


Phoenix Capital Research





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TheRideNeverEnds's picture

You are missing the only measure of value in the market that actually matters; SPX vs FED balance sheet.  


Using this key metric equities are fairly priced and given the terrible macro data and overall deterioration we can expect both to go sharply higher.  

AdvancingTime's picture

We may soon be forced to face our economic Armageddon. The forces that have driven stock markets ever-higher and upward may be beginning to wane. Many markets became distorted years ago when QE and super low interest rates hit the economy in an effort to lessen many of the missteps of recent years.  

This has been more helpful in holding up the underlying value of assets and derivatives it now appears than helping to repair a wounded economy. QE has up to now stopped an implosion of derivatives including the resulting contagion and shock that would have spread throughout the financial system. Unfortunately the economy has not fared as well as these asset prices and in many ways these policies have harmed Main Street. More on this subject in the article below,

litemine's picture

As a Canadian, I have thought with all the QE to Infinity , or all the $US. either in cash or Paper credits our Dollar should have risen. It didn't. Our stocks have only reached back to 2008 levels, some haven't got back there yet. Valuations in Oil companies and Miners are Low. Yet they produce a valuable commodity. A tradable asset World Wide.  Yes, the USA does buy the majority of what we sell but this does not make Sense. Some stocks, haven't increased their dividends and still payout 4+ percent.  This is a Valuation I understand and can believe in but some also have very stange trading patterns. I just can't understand it. Maybe thats why I'm not Rich.

Comte d'herblay's picture

possibly, but then there's this:



"There are more things in heaven and earth, Horatio, 
Than are dreamt of in your philosophy". 


elephant's picture

For five years, I've been looking at charts and reading logical explanations for why the markets is on the verge of immediate and immense collapse.   And yet they have continued to rise.

spinone's picture

Or it could go to near 45, like 1999