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Raw data: The stock market is very frothy

Here's the current overall valuation of the stock market:

This is the value of all stocks compared to expected earnings over the coming year. I've grayed out the post-pandemic surge, which was mainly a statistical artifact, in order to give you a better idea of how today compares to historical levels.

As you can see, the market is valued way over its average and is now at its second-highest level in decades. The only higher level was at the height of the dotcom frenzy, which lasted only a couple of years before plummeting.

Note that this is effectively adjusted for inflation since it's relative to growing corporate profits. There's no special reason it should change very much at any time aside from good old animal spirits. It's vanishingly unlikely this bull market will continue much longer, and when it falls it will probably lose upwards of a third of its value.

11 thoughts on “Raw data: The stock market is very frothy

  1. Joseph Harbin

    Market had a great first day after the election, but is below that close now. Altogether, indecisive. Will he or won't he do all those things he promised? Nobody knows. Maybe he'll find a real Treasury Secty and use some sense.

    Politics and investing don't make for clear thinking. Aside from the election, seeing some weakening in the economy. Could be nothing. Still TBD is question about the yield curve inversion. Was that a false signal, or just delayed?

    My two cents: If we really do get higher inflation, that'll slow down stocks. If Trump goes all in on tariffs, worker deportations, that'll bring real pain. Part of me thinks he'll want to avoid that outcome, another part thinks a bad economy will give him reason to take emergency actions. Then, buckle up.

    1. bbleh

      He's apparently ALREADY planning "emergency actions," in particular to deploy the military domestically to enforce mass deportation, which to me says -- unsurprisingly -- he needs no "reason" beyond some excuse he cooks up on the spur of the moment.

      Problem for him is, there's not a lot he can do about a recession, especially one caused by a large-scale shock to the labor market (unless I suppose he forces detained immigrants to work), and it's still not clear he understands what tariffs are. Whether and to what extent his cockamamie ideas become policy is still very much an open question, but unless he basically does nothing at all -- which I think is vanishingly unlikely -- I would expect some wild price fluctuations in at least some areas followed in the medium term by a significant recession. That is, yet another Republican economic screwup that's left to Dems to clean up.

      The MAGAts will blame everyone else, of course, and the Good Germans Republicans will clear their throats and look the other way, so it's not clear that even a combination of localized wild inflation and general recession would have much effect on his political standing, at least for a while. But in line with the OP, I'd recommend to anyone with investments of any sort to keep a weather eye out.

  2. jamesepowell

    "It's vanishingly unlikely this bull market will continue much longer, and when it falls it will probably lose upwards of a third of its value."

    Democrats, blacks, and immigrant will be blamed. Austerity will be the policy response. The rich will get richer.

  3. dspcole

    As if I didn’t already have enough to be depressed about…
    Maybe you could start doing cat blogging tuesdays and Fridays?

  4. realrobmac

    When this happens, gotta start calling it the Trump recession or the Trump Slump or Trumpflation.

    If Trump has taught Democrats nothing else, I hope he has taught them to identify an enemy and relentless say how that enemy is causing all of your problems and how we are the ones who can fight that enemy and solve the problem. The enemy is Trump, his billionaire buddies, and the big corporations they run. If that is not the Dems message moving forward then all hope is indeed lost.

  5. raoul

    PE valuations are not static and with the democratization and internationalization of the market one could expect a slow increase in valuations because demand exceeds supply. What we see is greater risk tolerance and more entrenched positions. The market of course remains volatile, almost by definition, but if I had to put a number of an acceptable average PE position I would say it has climbed from 12-16 to 16-20. Needless to mention, this increases the downwards risks (bigger loses) and could lead to a downward spiral. I would suggest to anyone to have more of their money in bonds and their respectable yields than equities.

  6. deathawaits

    "It's vanishingly unlikely this bull market will continue much longer, and when it falls it will probably lose upwards of a third of its value."

    Well if that is the case Vance isn't going to win an election in 2028.

    1. MikeTheMathGuy

      I could be wrong (and historically have been about lots of things), but I'm expecting buyer's remorse among voters to set in with unprecedented speed. 2026 should be a good year for Democrats -- although not enough to flip the Senate, alas -- and maybe 2028 is the year there's another 2008-like wave.

      1. deathawaits

        Buyer's remorse? I figured that was going to happen this year. After that stupid rally where Trump swayed to the music for like 40 minutes I was sure they would go, oh he's nearly as senile as he claims Biden is.

        I have given up trying to understand his appeal. (And his appeals, not that they are going to matter.) Maybe it is just Trump. His coattails were very thin. West Virginia wasn't going to elect another Democratic Senator. My own political hell is 6 more years of Mushmouth Blackburn.

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