â—¾The S&P 500 is selling at 25 times trailing-twelve-month earnings, compared to a long-term median of 15.
â—¾The Shiller Cyclically Adjusted PE Ratio stands at almost 30 versus a historic median of 16. This multiple was exceeded only in 1929 and 2000 â€“ both clearly bubbles.
â—¾While the â€œpâ€ in p/e ratios is high today, the â€œeâ€ has probably been inflated by cost cutting, stock buybacks, and merger and acquisition activity. Thus todayâ€™s reported valuations, while high, may actually be understated relative to underlying profits.
â—¾The â€œBuffett Yardstickâ€ â€“ total U.S. stock market capitalization as a percentage of GDP â€“ is immune to company-level accounting issues (although it isnâ€™t perfect either). It hit a new all-time high last month of around 145, as opposed to a 1970-95 norm of about 60 and a 1995-2017 median of about 100.
â—¾Finally, it can be argued that even the normal historic valuations arenâ€™t merited, since economic growth may be slower in the coming years than it was in the post-World War II period when those norms were established.
â€“ Howard Marks