Market Valuation: Is the Market Still Overvalued?

Market valuation is a critical aspect of understanding the current state of the economy and investment opportunities. Here is a summary of the four market valuation indicators that are updated monthly to provide insights into the market’s valuation:

• The Crestmont Research P/E ratio
• The cyclical P/E ratio using the trailing 10-year earnings as the divisor
• The Q ratio, which is the total price of the market divided by its replacement cost
• The relationship of the S&P composite price to a regression trendline

To facilitate comparisons, the two P/E ratios and Q ratio have been adjusted to their arithmetic means, and the inflation-adjusted S&P composite to its exponential regression. Based on the latest S&P 500 monthly data, the market is overvalued somewhere in the range of 80% to 140%, depending on the indicator, up from last month’s 71% to 128%.

The chart below illustrates these four approaches to market valuation. It also includes the geometric variant, providing an interesting alternative view for the two P/Es and Q ratios. In this chart, the range of overvaluation would be between 98% to 146%, up from last month’s range of 89% to 136%.

Understanding market valuation is crucial for investors and analysts to make informed decisions. Keeping an eye on these indicators can provide valuable insights into the market’s current state and potential future trends.