2014 Year End Market Valuation Update

Last year I looked at a few different valuation metrics that showed the US stock market  was trading at lofty levels. Following a strong year in which the S&P 500 returned nearly 14% I thought i would update some of those metrics to get an idea of where the market is at going into 2015.

Shiller P/E Ratio

As we head into 2015 the Shiller P/E stands at nearly 28, compared to its level of ~25 at the beginning of the year.

Shiller PE

Market Capitalization to GDP:

Market Cap/GDP has also spiked up to levels last seen in the tech bubble of ’99:

Buffett-Indicator

Tobin’s Q Ratio:

Finally Tobin’s Q has broken out from approximately 1 a year ago to 1.18 today.

Q-Ratio

Moving Forward

While these valuation metrics have had strong correlations with ten-year forward returns in the market, they tell little in terms of short-term timing. Indeed they all suggested poor future returns at the beginning of last year and the market recorded a nice gain in ’14.  That being said, with all these metrics reaching levels last seen at or above market peaks, caution still seems the prudent course of action.

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