3 Daggers for This Equity Bubble

2

The recent stock market volatility has caused the major averages to lose nearly all their gains for 2015. However, it is clear stock prices are still extremely overvalued by virtually every metric, especially when viewed in the absence of GDP and earnings growth.

For starters, the Cyclically Adjusted PE Ratio on the S&P 500 is 27 at the time of writing, whereas the normal level for this longer-term valuation metric is just 15. Also, the ratio of Total Market Cap to GDP is 125% at the time of writing. This reading, which measures the value of all stock prices in relation to the economy, is the second highest in history outside of the tech bubble and is far above the 110% level witnessed in 2007. And with a median PE ratio of all NYSE stocks at a record-high 22, there can’t be any doubt that stock prices are at extreme valuations.

But these lofty valuations sit atop negative earnings growth and a faltering economy. The Atlanta Fed’s GDP model currently shows Q1 2015 economic growth will come in at a paltry 0.2% annualized rate. And S&P Capital IQ predicts Q1 earnings will fall 2.9%, while also projecting Q2 earnings growth will contract 1.8%.
Read more at AffluentInvestor

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