The U.S. stock market remains significantly overvalued based on both Warren Buffett (Trades, Portfolio)’s market indicator and the Shiller price-earnings ratio as of Aug. 28, a few days ahead of Labor Day.
Differences between Shiller price-earnings and the Buffett Indicator
As discussed in previous articles, the Berkshire Hathaway Inc. BRK.ABRK.B CEO said the ratio of the total market cap to gross domestic product is “probably the best single measure of where valuations stand at any given moment.” As of Tuesday, the Buffett Indicator stands at 147.1%, suggesting significant overvaluation.
Yale professor Robert Shiller developed an alternative market indicator based on the inflation-adjusted figures for market cap and net income. To compute the Shiller price-earnings ratio, we first start with the net earnings of all companies trading on the Standard & Poor’s 500 index over the last 10 years and then adjust the past earnings based on the consumer price index. We then set the denominator of the Shiller price-earnings ratio as the average of the inflation-adjusted earnings.
Shiller price-earnings valuation nears twice historical average
The Shiller price-earnings ratio stands at 33.2 as of Aug. 28, approximately 96.4% higher than the historical mean of 16.9. Based on this market valuation, the implied market return is approximately -3.2% per year.
See also
GuruFocus also computes the Shiller price-earnings for each of the market sectors and individual companies like Walmart Inc. WMT and Apple Inc. AAPL.
Disclosure: No positions.
