Friday, November 11, 2022

11/22: Is the stock market over-valued?

Price of a stock is supposed to go close to its value in the long run. But how does one determine value? We have talked about Shiller's P/E ratio. From your Finance class, you know that the "value" of a stock is its discounted future earnings. But cannot observe future earnings, so Shiller used a moving average of past earnings and found that stock prices seem to revert to about 17 times earnings.
The current Shiller P.E Ratio for the S&P 500 is 39.89. Last month the ratio was at 38.68, and a year ago was at 34.51. In fact, the ratio is now at its highest level in the last 20 years.
Another value metric is the total capitalization of the stock market relative to GDP (From Zerohedge).  

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