Monitoring The Cape Ratio: Are Stocks Overvalued or Will the Bull Run Continue?
With the S&P 500 dropping more than 10% in March from its previous high of 6,144 in February, the benchmark has now rebounded and hit a new peak of over 6,180 on Friday.
Such a fast recoup in the broader market is unprecedented and can sometimes take years. That said, it's certainly a worthy topic of whether stocks are overvalued or if there is indeed a clear path for a Bull market to continue.
To do so, let's take a look at the Cape ratio, also known as the Shiller P/E ratio, and review the bullish sentiment that's lifting markets. Notably, the Cape ratio is used to calculate the price of the stock market or individual stocks relative to their average inflation-adjusted earnings over the last 10 years.
Keeping this in mind, the Cape ratio smooths out fluctuations caused by economic cycles, providing a clearer view of whether stocks are overvalued or undervalued based on their historical average.
Preluding the market correction earlier in the year, many analysts, including famed billionaire Jeffrey Gundlach, had called for a market recalibration based on the Cape ratio's reading of 38X earnings on the benchmark S&P 500, the second-highest level ever.
This Clinically Adjusted Price-to-Earnings Ratio (CAPE) has roots that date back to 1934, when David Dodd and Warren Buffett's mentor Benjamin Graham proposed smoothing out earnings over multiple years in their investment book 'Security Analysis', which provided a foundational idea behind CAPE.
Retroactively calculating historical earnings data for the U.S. stock market back to 1881, the Cape ratio was formally introduced by economists Robert Shiller and John Y. Campbell in 1988. Furthermore, the Cape ratio gained notoriety in the late 1990s and early 2000s, thanks to Shiller's warning of the dot-com bubble.
Following the broader market's most recent and historical rebound, the Cape ratio on the S&P 500 is currently at 36X, which is once again well above its historical average of around 16-17X.
Image Source: YCHARTS
Despite the Cape ratio indicating stocks are overvalued, a clearer path to global economic growth has been established with the U.S. officially reaching a framework trade deal agreement with China on Friday. President Trump's 10% baseline tariff on most countries is set to expire on July 8, but has eased concerns that rattled the stock market, providing a 90-day pause on higher imposed country-specific tariffs. While this deadline is just a few weeks away, Treasury Secretary Scott Bessent has advised that most trade deals should be done by Labor Day (Monday, September 1st).
Allowing more time for negotiations, the U.S. has come to a trade agreement with the U.K. as well and is in talks with other major trading partners, including the E.U., India, and Japan. Optimistically, May's jobs report and inflation data added fuel to the market rebound earlier in the month after coming in better than economists' expectations. Meanwhile, reports of an Israel-Iran truce were able to sustain this optimism, although it's noteworthy that President Trump has just gone on the record and said he is terminating trade talks with Canada at the time of this writing.
While overly bullish market sentiment can sometimes be questioned as a conundrum, investors should know that this usually preludes to higher corporate earnings, the general principle that manifests in a higher stock market.
Over the last decade, the earnings from the companies in the S&P 500 have grown by over 9% annually, with the index up a bullish +200% during this period.
Image Source: Zacks Investment Research
Considering the stock market needs higher EPS figures to ease the Cape ratio's overhyped reading, it's noteworthy that Zacks director Sheraz Mian has pointed out that S&P 500 earnings for the second quarter are currently expected to be up +4.9% from the same period last year on +3.9% higher revenues.
However, Mian also points out that while negative revisions to Q2 estimates have stabilized in recent weeks, tariff uncertainty has caused estimates for the period to be under significant pressure relative to other recent periods.
Inherently, for the bull run to continue, a relatively strong Q2 earnings season and better-than-expected corporate guidance will be crucial, with the Cape ratio at a very high 36X. This may certainly be the case with the S&P 500 already hitting a new all-time peak after rebounding +10% in just three months.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
This article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
25 minutes ago
- Yahoo
AMD Stock Gets Bullish Re-Rating as Export Ban Relief Sparks $800M Upside
Advanced Micro Devices, Inc. (NASDAQ:) is one of the . On July 30, Susquehanna analyst Christopher Rolland raised the price target on the stock to $210 from $135 and kept a 'Positive' rating on the shares. After previewing Q2 results, the analysts anticipate generally in-line to slightly better results on the back of stronger PC sales. This is because Intel acknowledged that tariff-related pull-ins continued in 2Q. The firm has also highlighted that AMD boasts server business strength. It has been gaining market share in EPYC data center CPUs. A major factor behind the upgraded outlook on AMD is that the government announced in July that it would review and likely renew AMD's license application for exporting MI308 AI chips to China. A close up of a complex looking PCB board with several intergrated semiconductor parts. Provided this occurs, it would help in reversing the previously anticipated $1.5 billion negative revenue impact from China restrictions. As of now, the firm expects AMD to recover an estimated $800 million in revenue during the second half of 2025 from the potential China sales. It also highlighted that much of the $800 million in MI308 inventory that AMD was planning to write down may now be sold at near-zero cost. Advanced Micro Devices, Inc. (NASDAQ:AMD) develops and sells semiconductors, processors, and GPUs for data centers, gaming, AI, and embedded applications. While we acknowledge the potential of AMD as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock. READ NEXT: 10 Must-Watch AI Stocks on Wall Street and Disclosure: None. Sign in to access your portfolio
Yahoo
25 minutes ago
- Yahoo
'The More Value You Provide, The More Money You Can Earn,' How This Self-Made Millionaire Employed 'One-To-Infinity' Leverage, Growing Her Net Worth
For years, Rose Han made her money linearly. She toiled away at her corporate job hour after hour, bringing home regular paychecks. The money was good, enough to help her tackle six figures of student loans and begin investing, but not enough to live the lifestyle Han desired. So she began to explore the idea of "leveraged income." "That's a completely different mentality that we don't learn in school,' Han told Business Insider. "Leverage is the explanation behind any significant wealth creation, no matter who you look at." Don't Miss: 'Scrolling To UBI' — Deloitte's #1 fastest-growing software company allows users to earn money on their phones. You can Accredited Investors: Grab Pre-IPO Shares of the AI Company Powering Hasbro, Sephora & MGM— Han, who now owns a financial literacy company, broke down the idea of leveraged income this way. A personal trainer who works one-on-one with clients has zero leverage. 'You show up, trade hours for dollars, and you get paid," she told the outlet. Trainers who run group fitness classes and can work with multiple clients at once have what she calls "one-to-many" leverage. "Now they're serving 10 people at once and therefore making about 10 times more,' she said. The goal, though, is "one-to-infinity" leverage. This could look like a personal trainer who builds an app that can be downloaded by an endless number of people. Essentially, you do the work once and are able to reap the benefits for years to come. "That concept really was the key that I unlocked," she said. For Han, the jump to "one-to-infinity" leverage didn't happen overnight. Trending: $100k+ in investable assets? – no cost, no obligation. She started her business in the basement of a co-working space, where she hosted regular classes based on her own experiences. 'I was just learning a lot on my financial awakening journey, so I wanted to share it,' she told Business Insider. 'In the back of my mind, I thought, 'OK, maybe there's some way I could make this lucrative,' but that's not the goal.' After two years, she started posting some of her classes on YouTube. 'The idea that a video could reach millions of people, 24/7, for the rest of my life and even after, that was really just wild to me,' Han said. 'I was skeptical because I'd never gone on camera. It was scary."These days, her YouTube channel has nearly 1 million subscribers and has evolved into an entire company with online courses, brand deals, affiliate links, and even a book deal. "I worked a lot to create that course, and it didn't just happen in seven days, but I created something once that I could sell over and over and over and serve a lot of people. I created a lot of value with something, and so I got paid in that exponential way," she told Business Insider. Those looking to emulate Han's success should start by asking themselves one question, she says: What value can I provide? 'I fully believe that the more value you provide, the more you can earn,' Han told the outlet. 'And, if you think creatively enough, there's no limit to how much value you can provide and therefore how much money you can earn.' Read Next: Here's what Americans think you need to be considered wealthy. Image: Shutterstock UNLOCKED: 5 NEW TRADES EVERY WEEK. Click now to get top trade ideas daily, plus unlimited access to cutting-edge tools and strategies to gain an edge in the markets. Get the latest stock analysis from Benzinga? APPLE (AAPL): Free Stock Analysis Report TESLA (TSLA): Free Stock Analysis Report This article 'The More Value You Provide, The More Money You Can Earn,' How This Self-Made Millionaire Employed 'One-To-Infinity' Leverage, Growing Her Net Worth originally appeared on © 2025 Benzinga does not provide investment advice. All rights reserved. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
25 minutes ago
- Yahoo
Trump orders firing of US official as cracks emerge in jobs market
President Donald Trump said Friday he has ordered the firing of a key economic official, accusing her of manipulating employment data for political reasons after a new report showed cracks in the US jobs market. US job growth missed expectations in July, Labor Department data showed, and revisions to hiring figures in recent months brought them to the weakest levels since the Covid-19 pandemic. Without providing evidence, Trump lashed out at the department's commissioner of labor statistics, writing on social media that the jobs numbers "were RIGGED in order to make the Republicans, and ME, look bad." In a separate post on his Truth Social platform, he charged that Commissioner Erika McEntarfer had "faked" jobs data to boost Democrats' chances of victory in the recent presidential election. "McEntarfer said there were only 73,000 Jobs added (a shock!) but, more importantly, that a major mistake was made by them, 258,000 Jobs downward, in the prior two months," Trump said, referring to latest data for July. "Similar things happened in the first part of the year, always to the negative," Trump said, insisting that the world's biggest economy was "booming" under his leadership. He later told reporters "we need people that we can trust," accusing the economic official of inflating hiring figures under former president Joe Biden's administration. - 'Dangerous precedent' - The United States added 73,000 jobs last month, while the unemployment rate rose to 4.2 percent from 4.1 percent, said the Department of Labor earlier Friday. Hiring numbers for May were revised down from 144,000 to 19,000. The figure for June was shifted from 147,000 to 14,000. This was notably lower than job creation levels in recent years. During the pandemic, the economy lost jobs. The employment data points to challenges in the key labor market as companies took a cautious approach in hiring and investment while grappling with Trump's sweeping -- and rapidly changing -- tariffs this year. The numbers also pile pressure on the central bank as it mulls the best time to cut interest rates. With tariff levels climbing since the start of the year, both on imports from various countries and on sector-specific products such as steel, aluminum and autos, many firms have faced higher business costs. Some are now passing them along to consumers. William Beach, who previously held McEntarfer post at the Bureau of Labor Statistics, warned that her firing "sets a dangerous precedent and undermines the statistical mission of the Bureau." The National Association for Business Economics (NABE) condemned her dismissal, saying large revisions in jobs numbers "reflect not manipulation, but rather the dwindling resources afforded to statistical agencies." "Firing the head of a key government agency because you don't like the numbers they report, which come from surveys using long established procedures, is what happens in authoritarian countries, not democratic ones," slammed Larry Summers, former US Treasury secretary under Democratic president Bill Clinton. - 'Gamechanger' - Heather Long, chief economist at the Navy Federal Credit Union, said Friday's jobs report was a "gamechanger." "The labor market is deteriorating quickly," said Long, noting that of the growth in July, "75 percent of those jobs were in one sector: health care." "The economy needs certainty soon on tariffs," Long said. "The longer this tariff whiplash lasts, the more likely this weak hiring environment turns into layoffs." It remains unclear when the dust will settle, with Trump ordering the reimposition of steeper tariffs on scores of economies late Thursday, which are set to take effect in a week. A sharp weakening in the labor market could push the Federal Reserve toward slashing interest rates sooner to shore up the economy. On Friday, the two Fed officials who voted this week against the central bank's decision to keep rates unchanged warned that standing pat risks further damaging the economy. Both Fed Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller argued that the inflationary effects of tariffs were temporary. They added in separate statements that the bank should focus on fortifying the economy to avert further weakening in the labor market. Putting off an interest rate cut "could result in a deterioration in the labor market and a further slowing in economic growth," Bowman said. bys/sla/aks/acb Inicia sesión para acceder a tu portafolio
