Is the Market Still Overvalued?
Here is a summary of the four market valuation indicators we update on a monthly basis.
- The Crestmont Research P/E Ratio (more)
- The cyclical P/E ratio using the trailing 10-year earnings as the divisor (more)
- The Q Ratio, which is the total price of the market divided by its replacement cost (more)
- The relationship of the S&P Composite price to a regression trendline (more)
To facilitate comparisons, we've adjusted the two P/E ratios and Q Ratio to their arithmetic means and the inflation-adjusted S&P Composite to its exponential regression. Thus the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which we're using as a surrogate for fair value. Based on the latest S&P 500 monthly data, the market is overvalued somewhere in the range of 127% to 204%, depending on the indicator, down from 128% to 207% the previous month.
We've plotted the S&P regression data as an area chart type rather than a line to make the comparisons a bit easier to read. It also reinforces the difference between the line charts — which are simple ratios — and the regression series, which measures the distance from an exponential regression on a log chart.
Note on discrepancies over recent months:
We've received a number of inquiries regarding the large shift in the average of the four and the Q-Ratio. We dug into this further and the large shift was not truly due to an error on our part. We compared the June 2020 Federal Accounts figures when released with the latest figures for June 2020 and noticed a large discrepancy. The Q-Ratio is the only valuation metric in the four that uses the Fed Accounts. There were major revisions to specific parts of the Fed Accounts in April 2021 due to a "data error". You can read the explanation here - scroll down to the April 2021 notice: https://www.federalreserve.gov/feeds/z1.html.
The chart below differs from the one above in that the two valuation ratios (P/E and Q) are adjusted to their geometric mean rather than their arithmetic mean (which is what most people think of as the "average"). The geometric mean increases our attention to outliers. In our view, the first chart does a satisfactory job of illustrating these four approaches to market valuation, but we've included the geometric variant as an interesting alternative view for the two P/Es and Q. In this chart, the range of overvaluation would be in the range of 145% to 224%, down from last month's 147% to 227%.
The Average of the Four Valuation Indicators
The next chart gives a simplified summary of valuations by plotting the average of the four arithmetic series (the first chart above) along with the standard deviations above and below the mean.
At the end of last month, the average of the four is 166% — down from 167% the previous month.