Yikes—Stocks Are Priced High! Too High?

Traders work on the floor of the New York Stock Exchange (NYSE) ahead of the closing bell in New York City, on Aug. 5, 2024. Charly Triballeau/AFP via Getty Images

Stocks have been on an uphill march since we began to exit the financial crisis of 2008–09. Massive monetary and fiscal intrusion into the market was thought needed to blunt the crisis, and even more when the pandemic hit in early 2020. Trillions of dollars buoyed asset values from cars to homes and from stocks to cryptocurrency. Anyone participating in these investments was making a lot of money—and still is today. But will it continue? Or are we going to finally get back to cyclical economic history and see stocks take a great fall?

The first step is to define what is a “good” (stock) price-to-earnings (P/E) ratio for investment purposes. There are different cuts and views that provide more insight than only an aggregate calculation might provide, such as:

• industry P/E average
• index P/E average
• company’s P/E average
• the top three closest competitor’s P/E average

If the P/E ratio of stock ranges close to each of those four averages, it may be considered fairly valued. But, conversely, consistently high P/Es indicate a possible overvaluation condition, while consistently low P/Es may indicate undervaluation.

Warren Buffet

The Buffett indicator is a widely used measure for assessing overall valuation of the stock market. It compares the total market capitalization of the U.S. stock market to our gross domestic product (GDP). For the United States, the Buffett indicator is calculated by dividing the Wilshire 5000 index—a broad market proxy—into the stock market valuation. The most recent Bureau of Economic Analysis estimate of the 2024 U.S. GDP is approximately $29.24 trillion, up 1.6 percent from last year.