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Is the Market Overpriced?

By Nathan Goodwin

Since the market hit its low in the 2008-09 crisis, we’ve seen an incredible run with stocks up roughly 180% over this five year periodDoes this mean the market is now overpriced? Some fear the answer is yes, but looking at a few statistics may say otherwise. Let me say this is not a prediction of future performance, only a brief comparison of where the market sits today with historical averages.

First, consider corporate profits. Many companies are making more money than they ever have. This is evidenced by looking at the EPS (Earnings per share) for the S&P 500.

S&P 500 Forward 12-Month EPS vs. Price: 10-Year

yardeni graph

* Graph from Yardeni Research.

The EPS for the S&P 500 has never been higher. Additionally, if you compare this to the trading level of the S&P, which gives you the Price to Earning ratio, it’s inline with historical averages. This indicator suggests that the market is not overpriced and current trading levels are supported by the higher earnings of these companies. The following chart shows this along with several other commonly used ratios.

jp morgan chart

**This chart from the JP Morgan Market Insights Worldview 2Q 2014 presentation.

Simply looking at a chart from the last few years might give the impression that the market has to correct, but remember where we came from. The S&P’s fall during the recession took us back to prices not seen since 1996. A long term view of the market can paint a different picture of where we are, one of playing catch up rather than getting ahead. While stocks may not be trading at the bargain they were a few years ago, one can made a good argument that they are not overpriced either.

The current environment of low interest rates and low inflation, combined with a continued economic recovery in the U.S. and around the globe, provides the opportunity for further growth in the days ahead. Remember, political and economic conditions can change quickly, but a look at historical averages suggests that the market is fairly priced.

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