Are U.S. Stocks Really The Only Game In Town?

The S&P 500 notched an all-time record high of 2130 on May 21, 2015. That was 10 months ago. Since that date, the popular gauge has suffered two faith-rattling corrections – a 12% decline in August of 2015 and a 14% pullback in February of 2016. Granted, U.S. stocks rallied back to respectable levels after each sell-off. On the other hand, the index has yet to make any bull market progress for the better part of a year.

Regrettably, news providers have been noticeably bearish near the market’s valleys; they’ve been decidedly bullish whenever the S&P 500 has pulled within spitting distance of May’s high-water mark. Wouldn’t it be refreshing if financial media mega-stars expressed enthusiasm when stocks sink to 52-week lows? When investors stand a better chance of buying lower?

Instead, CNBC mouthpieces typically articulate confidence at overvalued levels. For example, Factset recently documented that the current GAAP P/E ratio of 23 sits in the 99.5 percentile of trailing twelve month (TTM) stock valuations. In other words, stocks may be more exorbitantly priced right now than at nearly any other point in market history.

It gets worse. Stocks are exceptionally “overbought” on technical indicators like relative strength (RSI). One considers stocks to be overbought when RSI rises above 70. Today? The S&P 500’s RSI (7-day) is above 80 for the first time since the infamous “Bullard Bounce” from November of 2014.

 

Perhaps ironically, the S&P 500 is more expensive at 2050 today than when the benchmark notched 2075 in November of 2014. Back then, the GAAP P/E of 21 may have been semi-ridiculous. Yet investors at least had an expectation of 7%-10% earnings growth going forward. Since that time, earnings have declined for three consecutive quarters (Q2, Q3 and Q4 of 2015) and they are widely anticipated to fall more than 8% for the first and second quarters of 2016. Translation? Forward P/E ratios portray stocks as incredibly overvalued every bit as much as current P/E ratios.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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