Six Ways US Stocks Most Overvalued in History


US large cap stocks are the most overvalued in history. Let's investigate six ways.

Crescat Capital claims US large cap stocks are the most overvalued in history, higher than prior speculative mania market peaks in 1929 and 2000.

Their 25-page presentation makes a compelling case, with numerous charts. It's worth your time to download and investigate the report.

Six Ways Stocks Most Overvalued in History

  1. Price to Sales
  2. Price to Book
  3. Enterprise Value to Sales
  4. Enterprise Value to EBITDA
  5. Price to Earnings
  6. Enterprise Value to Free Cash Flow

Here are a few snips from the report.

Bear Market Catalysts

There are many catalysts that are likely to send stocks into bear market in the near term. A likely bursting of the China credit bubble is first and foremost among them. Our data and analysis show that China today is the biggest credit bubble of any country in history. We believe its bursting will be globally contagious for equities, real estate, and credit markets.

The US and China bubbles are part of a larger, global debt-to-GDP bubble, which is also historic in scale, and the product of excessive, lingering central bank easy monetary policies in the wake of the now long-passed 2008 Global Financial Crisis. These policies failed to resolve the debt-to-GDP imbalances that preceded the last crisis. Now, easy money policies have created even bigger debt-to-GDP imbalances and asset bubbles that will precipitate the next one.

We are in the very late stages of a global economic and business expansion cycle with investor sentiment reflecting record optimism typical at market peaks, a sign of capitulation at the end of a bull market.

Crescat is positioned to profit from the coming broad, global cyclical market and economic downturn that we foresee. We strongly believe that our global equity net short positioning in our hedge funds will be validated soon.

Cyclical PE Smoothing

It is critical to use cyclical smoothing to accurately gauge market valuations in their current and historical context when using P/E.Yale economics professor, Robert Shiller, received a Nobel Prize in 2013 for proving this fact so we hope you will believe it.

The problem with just looking at trailing 12-month P/E ratios to determine valuation is that it produces sometimes-false readings due to large cyclical swings in earnings at peaks and valleys of the business cycle. For example, in the middle of the recession in 2001, P/Es looked artificially high due to a broad earnings plunge. P/Es can also look artificially low at the peak of a short-term business cycle, which can produce what is known as a “value trap”, such as in 2007 during the US housing bubble and such as we believe is the case today in China, Australia, and Canada.

Shiller showed a method for cyclically-adjusting P/Es using a 10-year moving average of real earnings in the denominator of the P/E. Shiller’s Cyclically-Adjusted P/E, called CAPE multiples have been better predictors of future full-business-cycle stock market returns than raw 12-month trailing P/Es. Shiller showed that markets with historically high CAPEs lead to low long-term returns for long-only index investors.

Shiller CAPEs are fantastic, but they can be improved by including an adjustment for corporate profit margins which makes them even better predictors of future stock price performance and therefore even better measures of cyclically-adjusted P/E for valuation purposes.

Shiller’s CAPEs simply need an adjustment for profit margins because margins are a key element of earnings cyclicality. We can understand this by looking at median S&P 500 profit margins in the chart below. For example, even though profit margins were cyclically and historically high during the tech bubble, they are even higher today. In the same spirit of Shiller’s attempt to cyclically adjust earnings to determine a useful P/E, CAPEs need to be adjusted for cyclical swings in profit margins.

Image placeholder title

When we multiply Shiller CAPEs by a cyclical adjustment factor for profit margins (10-year trailing profit margins divided by long term profit margin), we get a margin-adjusted CAPE that is not only theoretically valid but empirically valid as it proves to be an even better predictor of future returns than Shiller’s CAPE!

Credit goes to John P. Hussman, Ph.D. for the idea and method to adjust Shiller CAPEs for swings in profit margins.As we can see in the Hussman chart below, margin-adjusted CAPE, shows that today’s P/E ratio for comparative historical purposes is 43, the highest ever! The 1999 peak P/E was 41 and the 1929 P/E was 40. Once again, we can see that today we have the highest valuation multiples ever for US stocks, higher than 1929 and higher than 1999 and 2000!

Margin-Adjusted CAPE

Image placeholder title

Mish Comments

It's easy to discard such talk, just as it was in 2000 and 2006. People readily dispute CAPE, concocting all sorts or reasons why it's different this time.

The most common reason is interest rates are low. We also hear "stocks are cheap to bonds" which is like saying moon rocks are cheap compared to oranges.

I do not know when this all matters. And no one else knows either. What I am sure of is that it will matter.


I don't know when, nor am I sure how it happens.

It could play out as a crash or stocks can decline over a period of 6-10 years with nothing worse than a 15% decline in any given year, accompanied with several sucker rallies leading people to believe the bottom is in.

History Lesson

Some might ask: If you don't know when or how, of what use is such analysis.

The answer is that history shows this is a very poor time to invest in stocks. That does not mean that they cannot go higher (and they have).

History also suggests that people who invest in bubbles start believing in them. People believe in bubbles because they have to in order to rationalize their investments.

Others know full well it's a bubble, but they think they can get out in time. Historically, only a few do, because most are conditioned to "buy-the-dip", and keep doing so even after it no longer works.

Yesterday, I noted Oppenheimer Predicts PE Expansion, Most Bullish S&P Forecast Yet.

So if you are looking for a reason to stay heavily invested in this market, you have one. But don't fool yourself, this is the most expensive market in history.

Mike "Mish" Shedlock

Comments (12)
No. 1-12

I broadly agree but how do you apply CAPE to value a biotech company that has been around for a few years? How do you value Amazon? On CAPE I assume Amazon is a lemon? GE on the other hand...


In complete agreement. US stocks are the most overvalued in history: six ways from sunday.


I would suggest "six ways stocks are the most HIGHLY valued in history". That is a more objective term versus the opinion that they are "overvalued".


How should one invest???


Figure 5 on page 5 of the Yardeni charts linked below shows Fed, ECB and BOJ cumulative balance sheets still expanding at a rate of 10% annually. Anyone think nominal asset prices continue to increase for another year due to QE still ongoing?


Incorrect: "... are the most overvalued in history..."


Correct: "...this is the most expensive market in history."


How do you separate the GDP of the US from the GDP of China, which is the 51st state. Amazons PE doesn't bother me as much as how the global economy fragments the economies of the various sovereigns. If Wall St is making obscene profits from Chinas' labor, at some point won't China want some of the action?


We have entered uncharted waters and should take nothing for nothing for granted. To assume we will move forward without a glitch is extremely optimistic. With the passage of time, things change and evolve. This transformation can be seen in both society and the economy. A question we must ask is just how relevant today's comparisons are with prior economic cycles?
The situation today is in many ways "historically unique" due to the rampant expansion of credit in recent decades. Recently I found myself pondering the line, "outwit and outlast" that is often used during the popular hit television show Survivor. It occurred to me the winners in both life and investing often reflect these qualities and that this game is far from over. More on this train of thought in the article below.


The combination of awe-inspiring highs in available credit (thanks to worldwide QE), plus enough demand for that credit from greedy investors resulted in the largest ever demand for assets in history. With relatively fixed supply of assets, their prices rose. It's fairly simple--Econ 101.
It stops when credit contracts (starting with Fed tightening, but we still have EU and others pumping) OR when demand for risky assets changes because of some fundamental problem that scares everyone. There is nothing on the horizon short of nuclear war that appears likely to derail the US stock market. However, when it derails, the crunch on the backside will likely be the largest in history, and will probably result in a "new economic theory" because of the severity. When will that be? Good question, and whoever guesses right "wins," as falling markets are by far the easiest way to make money. Valuations are extreme for a reason, and yes, this time is different. But if demand ever changes, the downside potential is also at all time highs!


You don't "have to be" invested in stocks and bonds at all times. Sometimes the right thing to do is to be "out". Now is one of those times.


And to those commenting that it is incorrect to say "overvalued", and more correct to say "highly valued", you are wrong. A financial security has an objective value, and the return one will receive when purchasing that security is a function only of the price one pays, period, end of story.

Global Economics