Recently, the US stock market has experienced a rebound, and the shadow of the big drop in early August seems to have dissipated. However, renowned financial commentator James Mackintosh believes that this rebound is very "stupid". Product structure, 10-30 billion yuan products operating income of 401/1288/60 million yuan respectively.

Using three key stock valuation tools, cyclically adjusted price-to-earnings ratio (CAPE), forward price-to-earnings ratio (forward PE), and the Federal Reserve model (Fed Model), James Mackintosh measures market valuation and concludes that:

All of these indicators indicate that the valuation of large US stocks is uncomfortably high. Not only are they expensive relative to historical levels, they are also higher than small-cap stocks, foreign stocks, corporate bonds, and government bonds. If these measures are correct, then the recent rebound may be foolish and it's time to stay away from large stocks.

If these measures are correct, then the recent rebound may be foolish and it's time to stay away from large stocks.

All three indicators together show that US stocks are too expensive!

Let's take a closer look at these three indicators:

Cyclically adjusted price-to-earnings ratio (CAPE)

CAPE is the market value of a stock market divided by the average EPS (earnings per share) of the past 10 years, providing a longer-term perspective on stock market valuation, and was proposed by Yale professor Robert Shiller. Currently, the CAPE value of the S&P 500 index is 35 times, the third highest since the 19th century, and even higher than the high point in 1929. James said that this means the S&P 500 index is extremely expensive, especially the largest stocks.

Currently, the CAPE value of the S&P 500 index is 35 times, the third highest since the 19th century, and even higher than the high point in 1929. James said that this means the S&P 500 index is extremely expensive, especially the largest stocks.

Forward price-to-earnings ratio (Forward PE)

Forward PE is a valuation indicator that evaluates a company's stock price relative to its expected future earnings. It is calculated based on the expected EPS (earnings per share) of a company for the next year or longer. It has been compiled by the London Stock Exchange Group's IBES since 1985.

Similar to CAPE, the forward PE also shows that stocks are extremely expensive, although they are slightly cheaper than 2000 or the end of 2020, but the difference is not significant.

Federal Reserve model (Fed Model)

Fed Model is a tool used to evaluate the valuation level of the stock market relative to the bond market. It compares the yield of the stock market (usually the dividend yield) with the yield of long-term Treasury bonds. It was proposed by strategist Ed Yardeni in the late 1990s.

Currently, the model also shows that stocks are very expensive. A month ago, before the yield on 10-year Treasuries fell sharply, bond prices were even higher, and at that time the price of the S&P 500 index relative to bonds reached the highest level since 2002.

Mackintosh confirms the significance of these indicators, stating that when these indicators indicate that US stock valuation is too high, its return in the next ten years is often weak, and vice versa.

Since 1985, this model has generally been established, and the CAPE and forward PE are closely related to the S&P 500's return for the next ten years, explaining about 85% of the return changes, while the association of the Fed Model is slightly weaker.

Unfortunately, there is no perfect indicator, and long-term investment is not easy.

Based on the above analysis, some investors have proposed to "sell".

But Mackintosh said that long-term investment is not that easy. Each indicator has its advantages and disadvantages, and these disadvantages have led to some bad investment decisions in the past.

In July 1997, CAPE reached its highest point since 1929. Shortly thereafter, then-Federal Reserve Chairman Greenspan warned of a "irrational exuberance" in the market. However, since his speech, investors have seen an annualized return of 7% adjusted for inflation, better than the performance of the U.S. stock market since 1900. Product structure, 10-30 billion yuan products operating income of 401/1288/60 million yuan respectively.

What's worse, since then, CAPE has been cheaper than its long-term average only once. Although the buy signal in March 2009 was very effective, investors using this indicator are unlikely to continue to hold when the S&P index surges to the so-called overvalued level.

Analysts argue that an unprecedented meltdown is needed to bring CAPE back to its long-term average. A more likely explanation for CAPE levels is that stock valuations have increased as mutual funds and ETFs have made buying stocks easier and cheaper, wealth has increased, and inflation-adjusted interest rates have fallen sharply since 1980.

The disadvantage of forward P/E is the reliance on analysts, primarily those at major banks. James suggests,"long-term investors should be skeptical of anything based on Wall Street consensus."

"Long-term investors should be skeptical of anything based on Wall Street consensus," James suggests.

For the Fed's model, which uses earnings forecasts from the same analysts, it has issued some really wrong signals, such as in November 2007, when it suggested that stocks were the cheapest relative to bonds since 1985. However, the global financial crisis was looming, making it one of the worst times in history to buy stocks and sell U.S. Treasuries.

James stated:"Although valuation tools have performed well over the past few decades, they may be a product of specific market environments and may fail if market conditions change."

"Although valuation tools have performed well over the past few decades, they may be a product of specific market environments and may fail if market conditions change," James stated.

In addition, the effectiveness of these tools in other time periods is not so significant, as their effectiveness was exaggerated during the poor periods from the internet bubble to the financial crisis.

Editor/Lambor