If you think stocks are expensive, you have no idea...(Jun 13, 2015)

박재훈투영인

created At: 2/20/2025

Sell

This analysis includes a sell recommendation. Please carefully review all mentioned risk before proceeding.

Fact

The S&P 500's 12-month forward P/E ratio is currently 16.8, above the 5-year average (13.8) and the 10-year average (14.1). Elevated P/E ratios don’t guarantee immediate market declines; stocks can stay overvalued for extended periods. Historical data shows recovery phases in business cycles average 7.9 years from trough to peak. Citi’s analysis suggests the current cycle is 72% complete, implying potential for further market gains. To match the average cycle length, the S&P 500 would need to climb another 1,000 points from its current level (~2,100).

Opinion

The elevated P/E ratio highlights market optimism but also raises concerns about stretched valuations. While historical cycles suggest room for further growth, the market’s position late in the cycle increases vulnerability to macroeconomic shocks or policy changes. The fact that previous cycles ended in bubbles serves as a cautionary reminder that prolonged overvaluation can eventually lead to sharp corrections.

Core Sell Point

The S&P 500’s above-average P/E ratio signals potential overvaluation, but historical cycles suggest stocks could climb higher before hitting their peak, though risks of a future correction persist.

Relative to the earnings generated by their underlying companies, stocks are looking pretty expensive.

We're talking about the price-to-earnings, or P/E, ratio.

"The current 12-month forward P/E ratio is 16.8," FactSet's John Butters said on Friday. "This P/E ratio is above the 5-year average (13.8) and the 10-year average (14.1)."

But just because stocks are expensive relative to their long-term average is no guarantee that prices are doomed to fall immediately. Indeed, there are many instances in history when stock prices continued to rise and valuations continued to stretch for years before they corrected and reverted to the mean.

"Market multiples rarely trade at average levels," Morgan Stanley's Adam Parker once said.

Citi's Stephen Antczak examined the trajectory of the forward P/E ratio in the current and previous three cycles.

"The 'recovery' part of the last three business cycles has averaged 7.9 years (trough to peak)," Antczak said. "How far might we be from the peak of the current cycle? A sample of various markets suggest that we are 72% of the way through."

The S&P 500 is currently trading right around 2,100. But it would have to surge another 1,000 points for this P/E cycle to be "average."

Now, many folks would point out that the last two cycles were full-blown bubbles. But, that doesn't mean it won't happen again.

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