The S&P 500 has surged 27% this year, hitting over 50 record closing highs. Fed rate cuts, strong earnings, and a Trump win have fueled the stock market rally. However, Yardeni Research has highlighted five charts that show the stock market is trading near extreme valuations.
Today was the 54th all-time high in '24 for the S&P 500.
Officially the 5th most ever (since 1957 when it moved to 500 stocks).
62 in 2017 is next up.
With a new high in December, we've seen new highs in 10 out of 12 months this year (April and August didn't).
Not bad. pic.twitter.com/FiEJ27kjVr
— Ryan Detrick, CMT (@RyanDetrick) December 3, 2024
December has never been lower in an election year when the S&P 500 was up 10% or more at the midpoint.
Heard @fundstrat point this out this morning on @SquawkCNBC and I had to dig in. Good stuff, Tom. pic.twitter.com/AcxD67ceaW
— Ryan Detrick, CMT (@RyanDetrick) December 2, 2024
“We wouldn’t like to see them go any higher because that would force us to raise the odds of a 1990s meltup scenario from our current subjective probability of 25%,” Yardeni Research said in a Tuesday note. The trailing 12-month price-to-earnings ratio surged to 27.1x in the third quarter. While it is not near its highest level ever, it is well above its long-term average of 19.6x.
Another record close for the S&P index of US stocks — the 55th this year alone. Truly remarkable.#stocks #markets #investing #investors pic.twitter.com/ddIACpkhCS
— Mohamed A. El-Erian (@elerianm) December 3, 2024
The Buffett Ratio, which measures the total value of US stocks relative to nominal GDP, rose to a record high of 2.96x in the second quarter. Warren Buffett has previously indicated that when the ratio rises above 2.0x, it suggests the stock market is overvalued. The forward price-to-earnings ratio, based on forward-looking analyst estimates for corporate earnings, is nearing the peak seen during the stimulus-driven stock market rally of 2020 and 2021.
Stocks To Watch | ? Ready, set, trade! Keep an eye on these stocks as they set the market abuzz #StockMarket pic.twitter.com/3nd40q4Slt
— ET NOW (@ETNOWlive) December 4, 2024
At 22.0x, the forward P/E ratio is close to the 25.0x record high reached during the dot-com bubble in 1999.
Extreme stock market valuations
The Federal Reserve’s stock market valuation model compares the forward earnings yield of the S&P 500 with the 10-year Treasury yield.
When the two yields converge, it can suggest the stock market does not have an attractive valuation. The spread between the S&P 500’s earnings yield and the CPI inflation rate is another valuation measure to monitor. This measure tends to be negative during economic recessions and bear markets.
Currently, it has been only slightly positive for the past six quarters and trending lower. Ultimately, valuation measures have proven to be poor market timing tools. There’s nothing stopping the stock market from getting even more expensive before its next bear market correction.
“Investors will pay a higher P/E the longer they believe that the economic expansion will last. That’s because time is money. The longer the expansion, the longer that earnings have to grow to justify the current multiple,” Yardeni Research said.
Market Momentum vs. Valuation Risks
Investors remain optimistic, but some experts see risks. Strong earnings and Fed policies fuel the stock market rally. However, history shows rapid gains often lead to corrections. High valuations can limit future returns and increase volatility.
Some analysts believe long-term growth justifies higher prices, while others warn of a potential bubble. Watching key indicators, like earnings growth and interest rates, can help investors navigate uncertainty. While stocks may climb higher, smart investing requires balancing optimism with caution.
Photo by; RDNE Stock project on Pexels
