Stocks Expensive But Not Bubble Territory: New Indicator Shows Hope

Is the stock market too expensive? A new way of measuring stock prices suggests things aren't as bad as they seem, even though stocks are definitely pricey right now.

The traditional way of checking if stocks are overvalued uses something called the CAPE ratio (a tool that compares stock prices to company earnings over 10 years). Right now, this indicator says stocks are more expensive than 97% of the time over the past 60 years. That sounds scary!

But here's the good news: A new version of this indicator shows stocks are "only" more expensive than 87% of historical readings. While that's still high, it's notably better than the original reading.

Key facts about current stock valuations: • Most valuation tools are flashing red warnings • The new CAPE version has better predictive power than the original • Current levels suggest positive returns after inflation (when prices rise) • We're not seeing 1999-style bubble extremes

The difference between the two CAPE versions comes down to how they handle companies that get removed from the S&P 500 (America's 500 biggest companies index). This technical change makes a meaningful difference in the outlook.

Bottom line: Yes, stocks are expensive by historical standards. But unlike the dot-com bubble of 1999, the new indicator suggests investors can still expect to make money over the next decade, even after accounting for inflation. For nervous investors, that's a small but welcome piece of good news.

This is an AI-generated summary. Read the original article at: https://www.marketwatch.com/story/frothy-but-not-like-1999-this-new-valuation-indicator-has-stocks-beating-inflation-40482dd5?mod=mw_rss_topstories