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James Li
James Li
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US Market Shiller PE Ratio Closing In on 30

Overall stock market remains significantly overvalued as of April 2017

April 06, 2017

As of April 6, the U.S. stock market remains significantly overvalued. Although the total market cap / gross domestic product ratio dropped slightly below 130%, the Shiller PE valuation is currently 29.2, about 0.8 away from the critical milestone of 30. Based on the Shiller PE valuation, the expected annual U.S. market return is -1.60%.

Buffett market indicator still near 130% milestone

Warren Buffett (Trades, Portfolio)’s market indicator currently stands at 129.5%, which is 0.5% lower than the 130% milestone reached February 2017. Since January 2016, the Buffett indicator has increased approximately 30% and reached a new 15-year high. Based on current market valuations, the U.S. stock market expects an annualized return of -0.7% including dividends. The expected annual returns range from -8.5% (for the most pessimistic case) to 4.2% (for the most optimistic case).

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Shiller PE of U.S. market continues to rise

While Buffett measures market valuations using the price-sales ratio of the U.S. stock market, Yale professor Robert Shiller values the market using a cyclically adjusted price-earnings (CAPE) ratio. Unlike the regular PE ratio, the CAPE adjusts the earnings from the past 10 years using the consumer price index. This adjustment eliminates the cyclical nature of earnings due to business expansions and contractions.

The Shiller PE of the U.S. market is currently 29.2, approximately 75% higher than the historical mean of 16.7. During the past 15 years, the U.S. market CAPE seldom dropped below the historical mean. Since third-quarter 2011, the Shiller PE has increased from 20 to its current value.

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Shiller PE broken down by sectors

While the overall U.S. stock market is significantly overvalued, the market is seldom balanced. To determine which sectors have good value potential, we can analyze the sector Shiller PE ratios. Table 1 summarizes the Shiller PE of each of the 11 sectors of the Standard & Poor’s 500 index.

Market Sector

Number of SP 500 Stocks

Shiller PE

Energy

35

17.4

Consumer Defensive

41

23.2

Financial Services

70

23.5

Industrials

70

23.9

Utilities

28

25

Health Care

59

27.1

Basic Materials

22

27.1

Consumer Cyclical

86

28.3

Communication Services

9

30.9

Technology

60

31

Real Estate

24

48

Overall S&P 500

500

29.2

Table 1: The Shiller PE by Sectors for S&P 500 Companies

As illustrated in Table 1, energy, consumer defensive and financial companies have relatively low Shiller PE ratios compared to the other sectors. On the other hand, the communication, technology and real estate sectors have Shiller PE ratios higher than the overall S&P 500, indicating these sectors offer little value potential for April 2017.

GuruFocus Premium members can find good defensive opportunities through several value screeners, including the All-in-One Guru Screener, the Buffett-Munger Screener and the Aggregated Portfolio of Gurus. The model portfolios for the latter two value screeners have generally outperformed the market in at least seven of the past nine years. You can click on the desired sector in Table 1 to view a list of U.S. companies in that sector whose minimum weighting is at least 5%.

If you are not a GuruFocus Premium member, we invite you to a free seven-day trial.

About the author:

James Li
I am an editorial assistant and researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website


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