Market News

Is a Market Crash Looming? Signs of Overvaluation

The U.S. stock market is approaching the high valuation levels last seen at the peak on January 3, 2022.

When it recovers from a correction and approaches a new all-time high, it’s essential to compare current valuations with those at previous peaks. Investors often expect these downturns to eliminate prior excesses, setting the stage for a more sustainable bull market.

Unfortunately, this isn’t happening with the S&P 500 (SPX) right now. The chart below shows where various valuation indicators currently stand relative to their monthly distribution since 2000. A 100% reading signals an extremely bearish scenario, while 0% reflects the most bullish.

As the chart highlights, many of these indicators are hovering near the bearish end of the spectrum, close to—or even exceeding—the levels observed at the January 2022 peak.

This doesn’t necessarily mean the stock market won’t keep rising. However, if it does, it will enter even riskier territory than before the 2022 bear market.

Overvaluation doesn’t automatically trigger a market downturn, as valuations have limited predictive power over short-term horizons. But the indicators in this chart have a strong track record of forecasting returns over the next decade. As noted last month, they suggest that returns through 2034 may fall below inflation.

How today’s valuations compare to the past

The percentiles in the chart are based on monthly data since 2000, focusing on this period as some argue that older data is less relevant. Even if we accept this viewpoint, the market is still significantly overvalued.

Extending the analysis to include data since 1970 or 1950 reveals an even more overvalued market.

Any way you look at it, the stock market is dangerously overvalued.

ABC Trader

Recent Posts

Will the Dow Join the Santa Claus Rally?

U.S. Stocks Close the Week with Losses Despite Friday Rally U.S. stocks ended the week…

31 mins ago

$275 Profit in Real-Time: Mastering the Sonic System

Today, we have an important task to kick off the trading day: rolling over our…

1 day ago

Fast Profits: Mastering Double System Trading

Hello, traders! Today is Thursday, December 19th, and I’m excited to share insights on a…

3 days ago

Elite Traders’ Secret Tactics for 2025

As we enter 2025, now is the perfect time to sharpen your trading strategies and…

3 days ago

12 Trades in 2 Hours: Sonic System in Action

Today, the market is experiencing a significant sell-off. Let’s dive into the current situation and…

4 days ago

Stock, Bonds, and Volatility: Fed Meeting Impact

Stock Market Jitters: Fed Signals Slower Rate Cuts, Spiking Volatility Financial markets faced a wave…

4 days ago