So writes John Hussman, here, on Tuesday last:
Meanwhile, the current Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) of 24.2 is closer to 65% above its pre-bubble median. Despite the 10-year averaging, Shiller earnings – the denominator of the Shiller P/E – are currently 6.4% of S&P 500 revenues, compared to a pre-bubble norm of only about 5.4%. So contrary to the assertion that Shiller earnings are somehow understated due to the brief plunge in earnings during the credit crisis, the opposite is actually true. If anything, Shiller earnings have benefited from recently elevated margins, and the Shiller P/E presently understates the extent of market overvaluation. On historically normal profit margins, the Shiller P/E would be about 29 here. In any event, on the basis of valuation measures that are actually well-correlated with subsequent market returns, current valuations are now at or beyond the most extreme points in a century of market history, save for the final approach to the 2000 peak.
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You have been warned.
