Stocks have only been this expensive during the crash of 1929, the tech bubble, and the financial crisis
Stocks are getting a bit pricey.
All three major indexes break though their all-time highs on a seemingly daily basis, and this has pushed earnings multiples higher and higher.
The current 12-month trailing price-to-earnings ratio of the S&P 500 sits at 25.95x, while the forward 12-month price-to-earnings is roughly 17.1x, according to FactSet data. Each of these is higher than its long-term average.
In fact, based on one measure of valuation, the market hasn't been this expensive anytime other than before a massive crash.
The cyclical adjusted price-to-earnings ratio, better known as Shiller P/E, which adjusts the price-to-earnings ratio for cyclical factors such as inflation, stands at 27.86 as of Friday. There have only been a few instances in history when stocks have been this expensive: just before the crash of 1929, the years leading up to the tech bubble and its bursting, and around the financial crisis of 2007-09.
This does not necessarily mean that a crash is imminent — during the tech bubble, the Shiller P/E made it well into the 30s before coming back down. Additionally, there are some criticisms that Shiller P/E is generally more backward-looking since it adjusts for the cycle, so it may not be as accurate.
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Another caveat is that, during the three previous instances, investors have been incredibly bullish on stocks (there's a reason Robert Shiller's book is titled "Irrational Exuberance") and most indicators of sentiment — from the American Association of Individual Investors to Bank of America Merrill Lynch's sell-side sentiment indicator — are still depressed.
Still, an elevated level for the Shiller P/E certainly isn't going to make it any easier to sleep at night.
(Andy Kiersz/Business Insider)
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