If you need some good news in your life, look no further than the stock market. U.S. stocks have staged an epic comeback in recent days with the S&P 500 (.SPX
But wise investors are always looking ahead, and the inevitable question now is: are stocks overvalued?
A look at the numbers: The classic way to measure whether stocks are cheap or not is to look at the price-to-earnings ratio for the S&P 500. It's a gauge of whether corporate earnings actually justify the stock market level.
The PE ratio is currently at 19, according to S&P Capital IQ. That's above the historic average of 15, although not too far off from the average of the last decade, which is nearly 17.
To put it bluntly, the PE certainly isn't in Black Friday discount territory, but it doesn't exactly scream swindled, either.
The bearish case: Market pessimists often point to what is known as the Shiller PE after Nobel Prize winning economist Robert Shiller.
He takes the PE ratio and makes some adjustments for inflation and average earnings for the past decade. It's akin to looking at calories from fat instead of just calories.
According to the Shiller PE, stocks are pricey. We're now at 26.5 by his measure compared to the historical average of 16.
The height of the dotcom bubble saw the Shiller PE shoot up to 44, while the worst of the Great Recession saw the ratio bottom out at 13. Shiller himself has warned that we might be in another bubble.
But wise investors are always looking ahead, and the inevitable question now is: are stocks overvalued?
A look at the numbers: The classic way to measure whether stocks are cheap or not is to look at the price-to-earnings ratio for the S&P 500. It's a gauge of whether corporate earnings actually justify the stock market level.
The PE ratio is currently at 19, according to S&P Capital IQ. That's above the historic average of 15, although not too far off from the average of the last decade, which is nearly 17.
To put it bluntly, the PE certainly isn't in Black Friday discount territory, but it doesn't exactly scream swindled, either.
The bearish case: Market pessimists often point to what is known as the Shiller PE after Nobel Prize winning economist Robert Shiller.
He takes the PE ratio and makes some adjustments for inflation and average earnings for the past decade. It's akin to looking at calories from fat instead of just calories.
According to the Shiller PE, stocks are pricey. We're now at 26.5 by his measure compared to the historical average of 16.
The height of the dotcom bubble saw the Shiller PE shoot up to 44, while the worst of the Great Recession saw the ratio bottom out at 13. Shiller himself has warned that we might be in another bubble.