The Phaserl


Stock market flashing red at an overvaluation of 68 percent

Looking at Crestmont, Cyclical, Q Ratio, and S&P Regression all suggest market is in for an upcoming correction.


The stock market continues to make record highs even though profits do not warrant current valuations. Looking at four standard valuation models we find that the stock market is highly overvalued relative to earnings. For most Americans with little stock ownership, this is merely a sideshow as to what is unfolding in the real economy. Based on an average of four popular valuation models we find that the S&P 500 is overvalued by 68 percent. Typically you want to see earnings justify current valuations but something else is going on here. Either stocks are being priced at very optimistic future levels or hot money from the Fed is flowing into the stock market to avoid the slow erosion brought on by inflation. It is interesting to see some people falling for the myth that inflation is muted when housing values are up, college costs are soaring, energy costs are high, and healthcare costs continue to go up. Of course the CPI measure tends to understate inflation so it might be the case that market participants are diving into the game even with high valuations because they realize underlying inflation is much higher than what indicators are noting. One thing is certain and that is the current stock market is highly overvalued.

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1 comment to Stock market flashing red at an overvaluation of 68 percent

  • Ed_B

    “Stock market flashing red at an overvaluation of 68 percent”

    Clearly, the US stock market is over-valued but it is pretty self-indulgent to think that anyone can calculate this to the nearest 1%. Those who know better will say that, yes, the market IS over-valued and likely by 50-60%. This could be proved quite easily if the Fed were to halt all QE type programs, open and clandestine (such as via Belgium lately). The market would immediately understand that without this free Fed money support, it can no longer levitate at these ridiculous levels. It would then seek a new level, which IMO, likely would be somewhere in the 7,000 to 8500 range on the Dow 30 Industrial Index. But, the Fed cannot allow that to happen so we won’t be seeing this gutsy move from them any time soon. No, they will continue their current game of “it’s alright, things are getting better, the economy is improving, we expect to see some green shoots any moment now, etc. ad nauseum.

    I do believe that the market is significantly over-valued because we have the most mediocre economy since the Jimmy Carter days, which I remember well, being a young man at the time. Yet, while we have this mediocre economy, stock prices are at ALL TIME HIGHS. In spite of this rather obvious paradox, people seem only too happy to accept that things really are getting better. They WANT to believe this so badly that it simply MUST be happening. Unfortunately, it is NOT happening but the data from the Fed and the US Gov is being fudged in order to make people think that it is. So, on the one hand we have the Pollyanna rantings from official sources while on the other hand we have reality intruding on their theses. What does your own experience tell you about the number of unemployed, the labor participation rate, the falling rate of annual take-home pay for most Americans, and what it is costing you to put food on the table, gas in the car, buy insurance and health care, and pay your taxes? Those things are REAL and not altered by any fancy theories or convoluted measuring methods. In spite of all the official efforts to the contrary, I prefer to deal with reality, regardless of what our officials suggest is best. So, seen in that light, prepping for some very hard times in the not too distant future seems best. Got preps?

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