Why Market Valuation Matters

Market valuation has been featured in numerous media sources lately, with Forbes  and others weighing in on whether U.S. stocks are overvalued.

It is interesting to note that the Forbes article references a valuation figure that we track, an indicator that is a composite of several valuation sub-indicators. It uses not just price-to-earnings, but also dividend cash flow, sales, and more. These metrics indicate that the market is pushing about 30% overvalued as of the end of May.

Want to consider just median price-to-earnings? That metric is showing a 22% overvaluation. Any way you slice it, the market looks overpriced.

For all intents and purposes, the market has been turning sideways since it peaked in early March. The DOW in late May was lower than the peak, after having gyrated sideways for several months.  If you compare those numbers against where we were 6 months ago, they’re virtually the same. There’s just not that much to be excited about.

When a market stops offering a great deal of value, it doesn’t take much for people to take their money to the sidelines. This creates a lot of selling pressure. It’s not so much that people stop buying, it’s more that people start to take their money off the table, and that kind of behavior could ultimately cause a correction.

- Greg Stewart, CIO