Like a drunk driver who’s begun to believe the speed limit no longer applies, the stock market can continue onward to higher highs until the inevitable smash-up. Similar to the effects of inebriation, analysts and those who rely on them will continue to come up with reasons to keep buying.
Some will invoke hot concepts like the power of artificial intelligence. Others will drop the “innovative,” “visionary,” and “disruptor” themes that have driven markets so fiercely since the last crash. Whatever stimulates potential investors to keep coming back, relentlessly, for even more.
It’s impossible to call market tops much less exact market tops. If you’re feeling great about chasing the 5 or 6 growth stocks on fire right now, here are 3 measures you might want to consider before you hit the “buy me more” button again. None of these are perfect — it’s more like a “head’s up” when you get serious about sobriety again.
Price to earnings ratio.
This classic metric answers the question “how much in earnings do I receive based on the price I am paying?” It’s the most basic of valuation measures and the beginning point for the Benjamin Graham/Warren Buffett style analysis of fundamentals. Note that “expected earnings” play no part.
The idea is to start with what exists on the books now and to ignore narratives about next year or 5 years from now. It’s a “let’s keep our feet on the ground” concept. The mean price of the Shiller p/e is 16.75 — right now the ratio sits at 31.68. We are up there where it seldom goes, historically.
Thanks to multipl.com for the use of this chart and the next one…