Stock market remains overpriced despite recent corrections

The stock market remains expensive, even after recent drops in major indexes like the S&P 500 and Nasdaq Composite. These indexes saw declines of over 10%, placing them in correction territory. However, despite these falls, the overall market valuation is historically high. Two and a half years ago, the market hit a low point during a bear market. Since then, the stocks have generally trended upward until recent volatility returned. The S&P 500 is down about 10.1% and the Nasdaq has decreased by 13.7% since mid-February. But even with these corrections, the market's price-to-earnings (P/E) ratios remain high. Investors often use the P/E ratio to evaluate stock prices. A more reliable measure is the Shiller P/E ratio, which considers earnings over a longer period. In December 2024, this ratio peaked at 38.89. Now, even after declines, it stands at 34.47, still significantly above the historical average of 17.22. Historically, when the Shiller P/E exceeds 30, downturns have followed. Most previous instances led to declines of at least 20% in major indexes. This pattern suggests that the market may still experience more drops. Investors typically feel nervous during market corrections, but it is essential to consider time horizons. Long-term investors can often ride out these periods. Companies that have premium valuations, especially in tech, may face the biggest risks. For example, Palantir Technologies, known for its AI services, has seen its stock price soar but is now vulnerable. During market turbulence, many investors seek safer stocks, especially those that pay dividends. Companies like Philip Morris and Altria Group have performed well even during recent downturns. They offer stability and predictable returns, making them attractive in uncertain times. In summary, while recent market dips have occurred, the stock market's overall valuation remains historically high, suggesting potential for more volatility ahead.