- NVDA
- ^DJI
- ^IXIC
Look up the word “resilient” in the dictionary, and you’re liable to see a picture of the U.S. stock market.
Despite a litany of concerns, including above-average inflation, the Iran war, President Donald Trump’s tariffs, and long-duration Treasury bond yields reaching their highest level since the financial crisis, the iconic Dow Jones Industrial Average (DJINDICES:^DJI), broad-based S&P 500 (SNPINDEX:^GSPC), and growth-focused Nasdaq Composite (NASDAQINDEX:^IXIC) have all catapulted to several record highs this year.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
While the stock market has made a habit of climbing this proverbial wall of worry and blasting to new highs over the long run, we also know that bull markets aren’t indefinite. The stock market is cyclical, with corrections, bear markets, and even pesky crashes representing the price of admission for one of the world’s greatest wealth creators.
Although past events can never guarantee the future, some aspects of history have an uncanny ability to forecast what‘s to come. Currently, we’re witnessing the stock market do something that’s only been observed one other time since the early 1870s. Based on what history tells us, this signal foreshadows a coming disaster for Wall Street.
The stock market is making dubious history
While several historical warnings stand out at the moment, perhaps none is more glaring than stock valuations.
Valuing individual companies or the broader market is a really tricky subject to tackle because there’s no one-size-fits-all way to evaluate every business. Invariably, emotions and/or subjectivity will play a role in the valuation process, making it incredibly difficult to forecast short-term directional moves in individual stocks or the broader market with any sustained accuracy.
But there is one valuation tool, introduced by economists in the late 1980s, that provides investors with the closest thing they’ll find to an apples-to-apples valuation comparison on Wall Street. This tool, which does a phenomenal job of moving beyond emotion and subjectivity, is the S&P 500’s Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio).
What truly differentiates the Shiller P/E Ratio from the time-tested P/E ratio is the scope of earnings history examined by each valuation tool. Whereas the latter accounts for just trailing 12-month earnings, and can therefore be tripped up by recessions if earnings per share (EPS) turn negative, the Shiller P/E is based on average inflation-adjusted EPS over the trailing decade. Incorporating 10 years of EPS history provides useful valuation comparisons that recessions won’t skew.
