🧠 Is The Market 60% Overvalued?

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While humans have been around for almost 300,000 years, we only have stock market data going back 152 years. That said, it provides what appears to be a robust track record.

According to the data (back to 1871), today’s S&P 500 is very overvalued.


  • The historical average P/E for the S&P 500 is roughly 16.
  • Today, the S&P 500 trades for 26 times trailing earnings.

That means the S&P 500 is 60% overvalued compared to its historical average.

Does this mean you should sell everything and get out now?

There’s no telling what will happen next in the markets, but we think the answer is a firm “no.”

That’s because the historical average P/E ratio might not be helpful as it may appear. To understand why, a short history lesson can provide some critical nuance.

Here’s what we mean:

  1. The Wild West: From 1871 until 1929, there was no SEC. and scant public data on companies. Investors only knew a company was legit by the dividend it offered. That was all that mattered. No one cared about the P/E ratio. That’s 58 years of useless data.
  2. The Scars of the Great Depression: For the next three decades, the leading investing voice was Benjamin Graham. He was so scarred from losing money in the Depression that he only emphasized buying companies trading for less than their working capital. That’s simply not the case anymore. Another 30 years of less helpful data.
  3. The Pre-Internet Days: From 1960 to 1992, the average S&P 500 company only grew earnings per share by 0.2% per year. But from 1992 to 2021 — thanks to the Internet, low-interest rates, and globalization — they grew by 6.5% per year. All of a sudden, it made sense to pay for growth! Another three decades of data for the dustbin.

Admittedly, that leaves us with just 30 years of valuable data. But in those 30 years, the average P/E for the market was 24.7. That makes today’s market not 60% overvalued — just 6% overvalued.

That’s a much more comfortable range to be in.

This is a good example of why valuation can be so confusing. And this is for the market as a whole. Valuation gets even more nuanced when it comes to individual companies.

If you want to go deeper into how valuation works, join us for the second cohort of Valuation Explained Simply, which starts on August 7th.

In the course, we’ll use four valuation methods — Total Addressable Market, Common Multiples, Discounted Cash Flows (DCF), and Reverse DCFs — to show how businesses are valued.

If that interests you, use the code BBFRIEND249 at checkout to knock $249 off the price.*

Reviews from our first cohort in March were great, and we hope you join us in August.

Whether or not you join us, wishing you a highly valuable week of summer,

– Brian Feroldi, Brian Stoffel, & Brian Withers

P.S. The code BBFRIEND249 expires this Sunday (July 30th) at midnight EST.

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πŸ‘¨β€πŸŽ“ The next cohort of Valuation Explained Simply starts on August 7th. Use the code BBFRIEND249 at checkout to save $249.

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