Are stocks "Too High"?

Stock Prices: Is ‘Quite High’ Too High?


Consider one of the most widely followed ways of measuring stock valuations—the cyclically adjusted price/earnings ratio, or CAPE, which was devised by Robert Shiller, a Yale University economist and Nobel Prize winner. The CAPE is calculated by dividing stock prices by average earnings over the prior decade, all adjusted for inflation. The ratio for large U.S. stocks in April was 27, while the long-term average since 1881 is 16.6, according to Mr. Shiller’s data. When the ratio is above average, future returns are often lower down the road. When the ratio is below average, future returns tend to be relatively high.
Comment: I was asked this question this week. My take is that some stocks are too high. I think Facebook is too high. DOW ... about right (see image above). A tutorial on the P/E ratio.


  1. Buybacks and Dividends All That's Left in S&P 500, Goldman Says

    Comment: with inflation so low and interest rates near zero ... a stock that pays a 3% dividend is value

  2. U.S. Dividend Stocks Lose Luster - As Fed rate rise looms, investors begin to shy away from high-yield shares that have been big winners:

    Much like bonds, higher-yielding stocks—a stock’s yield is calculated by dividing its annual dividend by the share price—have been prized for their stability and steady dividends, a lure for buy-and-hold investors looking to earn income while preserving their original investment. They often trade at a discount to the market in terms of price/earnings ratio, reflecting their slower growth.

    But a rally in the shares has inflated their P/E multiples and reduced yields. Utility stocks recently traded at 18.5 times the last 12 months of earnings, up from 17 at the start of last year, according to FactSet. Their yield fell to 3.7% from 4.1% over the same period.

    The S&P 500 index trades at 18.4 times earnings and carries a dividend yield of 2.1%.


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