The S&P 500 Index is Approximately 29 Percent Overvalued

According to Wikipedia, "The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices and includes approximately 80% of the total market capitalization of U.S. public companies."

The thesis of this short blog article will be to assert that the S&P 500 index is presently significantly overvalued historically.  

The SPDR S&P 500 ETF Trust (SPY:US) seeks to achieve its investment objective by holding a portfolio of the common stocks that are included in the index (the “Portfolio”), with the weight of each stock in the Portfolio substantially corresponding to the weight of such stock in the index (ref. Yahoo Finance).  The SPY ETF is a good proxy for tracking the S&P 500.

The FASTgraphs chart of SPY below shows the historical index price trace (in black) versus the Normal Price/Earnings Ratio (P/E) trace (in blue at 18.81x) and the orange valuation line (GDF...P/E=G at 15.00x) which represents an average growth multiple. At the market close on February 16, 2024, the SPY had a blended trailing of P/E of 23.39. The blue P/E line represents the multiple that the market has tended to value the S&P 500 over time (since 2004 in this example).  Therefore, reasonable buying opportunities exist when the index trades below the blue line.  However, the most prime buying opportunities presented themselves during the recession in 2008, from roughly July 2010 through January 2013, and again during the Covid-19 crash in 2020.  This is when the index price (black line) traded at or below the orange valuation line.  

The next chart below indicates what kind of correction it would take for the S&P 500 to achieve a valuation for average growth of the entire index.  

From the February 16, 2024 closing price of $499.51 on the SPY, a correction of 29.36% would be needed to reach a more optimal valuation.  However, history suggests that these opportunities do not come around often.  When they do come around, it's probably time to back up the truck.  

In the final chart below, just for the index to get back to a more reasonable valuation and buying opportunity, I would want to see the index price line trade below the blue P/E line.  This would take somewhere between a 7-15% correction in the S&P 500.  Historically, an average stock market year contains at least one ten percent correction, so this is certainly feasible. This would also be healthy in terms of paving the way for further market gains going forward. The author is well aware that the market can trade significantly overvalued for periods of several months or multiple years at a time before a substantial correction of 10-15 percent or more.

There are millions of Thrift 401K fund investors that can switch in and out of various index funds such as ones that track the S&P 500. There are also numerous market timing strategies floating around based on favorable seasonality factors.  So it is important to be aware of the current valuation of the major indices such as the S&P 500, Nasdaq, etc., before transferring money in or out of 401K funds.  

Here is a list of external links used in this blog article: 

Thank you for reading and feel free to comment on this blog.  

Disclaimer: This blog has been created for sharing my personal investment ideas only. I do not receive any compensation for this blog or the content within. I am not an investment advisor or professional. This blog is my own personal opinion and is not meant to be a recommendation of the purchase or sale of any stock or ETF. Please do your own due diligence and research before deciding to purchase any investments of your own.





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