The S&P 500 index is trading at record high levels and optimism remains high with Barron’s professional money manager survey indicating a record 74% money managers being bullish on markets even at current levels. When valuations are measured with respect to expected growth, [however, the ensuing ratio, the PEG ratio,] suggests overvaluation at these levels. [Let me explain further.] Words: 254; Charts: 1
This article* from the website www.economicsfanatic.com was originally posted under the title S&P 500 Index PEG Suggests Overvaluation.
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Further edited excerpts are as follows:
The PE ratio is one good measure of market valuation. The PEG ratio makes this measure complete as it takes future growth into consideration and measures valuations with respect to expected growth [Price:Earnings Growth expectations]. For the S&P, the PEG ratio suggests overvaluation at current market levels. The chart below gives the PEG ratio for the S&P 500 index along with the PEG for the mid-cap and small-cap stocks. In general, a PEG ratio of over 1 indicates overvalued stocks or markets. Certainly, valuations are stretched at current levels.
The conclusion is to avoid fresh exposure to equities at these levels. Investors can consider booking profits and considering fresh exposure on corrections. I do expect equity markets to witness a meaningful correction over the next 3-6 months.
(Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)
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