Consumers are the most confident they have been in over six years, according to last week’s widely watched consumer confidence report from the Conference Board. Investors have been feeling confident too. The high valuations of stocks in some industries have been the talk of the markets lately, leading some to fear that a bubble in stock market valuation is again developing as investors become overly optimistic. The valuation of the stock market has risen sharply over the past year as investors have anticipated a better environment for growth. To gain perspective on whether a bubble has developed, we can compare the price-to-earnings ratios (PEs) of all 62 of the industries of the S&P 500 Index today to the same day 14 years ago in March 2000, at the top of the bull market—the last time a bubble in stock market valuation popped. The stock market was really “bubbly” in March 2000, with valuations of many industries floating higher, but now industry valuations are relatively flat.
Fourteen years ago a bull market came to an end, and 16 of the 62 S&P 500 industries, accounting for about 70% of the S&P 500 companies’ total market value, had PEs that could be called “bubbly”—PEs of over 30 on companies’ current fiscal year earnings estimates. Now, on March 28, 2014, just four industries out of 62—accounting for less than 4% of the S&P 500 market value—have PEs over 30.
At any given time, there are always some bubbly valuations among industries and stocks that are hot. But overall, the S&P 500 PE is currently a bit over 16 on current fiscal year estimates, slightly above the long-term average, but only half of what it was in late March 2000. Looking at valuations, compared to 14 years ago, the party in the stock market may not be just getting started — but it is not yet close to being over.
Click here to read the full report from Jeffrey Kleintop, CFA, Chief Market Strategist, LPL Financial.
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