Are U.S. Stocks Overvalued?

By Ron DeLegge

August 26, 2013 at 08:00 PM

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With major U.S. stock indexes near all-time highs, have stocks become too expensive?

The S&P 500 (SPY) crossed above a new high of 1,700 on Aug. 1 and is ahead by almost 20% since the start of 2013. Likewise, the Dow Jones Industrial Average (DIA) is ahead by 20% and trades near its all-time high of 15,650. And as stock prices have edged higher, so have valuations.

The forward 12-month P/E ratio for the S&P 500 has increased to 14.4 from 12.7 at the end of last year, according to FactSet. For historical perspective, it's worth noting S&P's current P/E ratio is only slightly above the 10-year average (14.1).

The reason the forward 12-month P/E ratio is not higher is that analysts are expecting record-level EPS over the next four quarters (Q3'13–Q2'14) for the S&P 500, reports FactSet.

Another measure of stock valuations is the Shiller PE Ratio, also known as the Cyclically Adjusted PE Ratio (CAPE Ratio). This particular gauge is the price earnings ratio based on average inflation-adjusted earnings from the previous 10 years and is less prone to dramatic fluctuations in any one year.

The S&P 500's current Shiller PE ratio is 24.85, which is above its historical median of 15.88 but still shy of its all-time peak of 44.20 in December 1999.

Put another way, the S&P 500 at current levels trades somewhere between cheap and expensive, but closer to cheap.

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