Stocks Are More Overvalued Than The Dotcom Bubble

The S&P 500 has climbed an eye-popping 376% from its bottom in the Financial Crisis.  Indeed, stocks are more overvalued than the Dotcom Bubble and ripe for correction.

One of the best indicators of how overvalued the stock market has become is the stock market cap to GDP ratio.  This is the ratio that Warren Buffet famously highlighted during the irrational exuberance of the Dotcom Bubble.

The stock market’s total market capitalization exceeds economic output.  Indeed, the total market cap of stocks is 139% the size of the economy.  That’s only a smidge below the 148% during the height of the Dotcom Bubble.

Stocks Are More Overvalued Than The Dotcom Bubble.

Mind you, the US economy was firing on all cylinders back then.  Growth came in above 4% for four straight years from 1996 to 2000.  Or to put it another way, the US economy grew at twice the pace it has over this economic cycle.  Accordingly, the obscene valuations back then were more justified than they are now.

Evidence piling up that stocks are more overvalued than the Dotcom Bubble

And that’s not the only measure that well above the historical average.  The S&P 500’s price-to-sales ratio is 2.14 — that’s just a smidge below the all-time high set in December.

Moreover, that’s about 44% above its historical average and 22.3% above the Dotcom Bubble.  This indicator is particularly poignant because it highlights that stock market valuations have far outpaced economic growth.

Finally, the historical average for the S&P 500 price-to-earnings (P-E) ratio is 15.7-times.  The S&P 500 current price-to-earnings ratio is a lofty 24-times.  That means S&P 500 is overvalued by a whopping 53% relative to its historical average.

Price-to-earnings ratio shows that stock valuations are very high.

What all this adds up to is that the stock market is clearly over-valued.  Investors are slowly starting to recognize this fact.  The first signs of this are already showing up in the markets as investors continue to give a tepid response to strong corporate earnings.

 

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Al Basoglu

I am a financial services professional with over a decade of experience in various roles. I've lived and worked abroad in 5 different countries while pursuing personal and professional challenges. My interests include markets, history and different cultures. I tend to weave all of my interest into my analysis and articles.