Thursday, March 13, 2014

Are We in a Bubble?

After five years of a stock market rising almost continuously, should investors start to be worried that we're in the midst of a bubble? Probably not, according to research from Bespoke Investment Group. This market may be a bit overvalued, but it's a long way from bubble territory.

The most common way to determine if a stock is overpriced is through its price-to-earnings ratio. Bespoke found that nine out of the ten largest companies in the S&P 500 are all now trading at P/E ratios of less than 20. In March 2000, at the height of the dot-com bubble, all ten of those companies traded at ratios over 20 - even though most of the highflying tech stocks were listed on the Nasdaq index.

Those ten biggest S&P companies now have an average P/E of 16.1. Back in March 2000, that same figure was 62.6. These are very different times for the stock market.

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