Research firm says stock market remains overvalued despite deflating 'everything bubble'

According to Ned Davis Research, the "everything bubble" of 2021 has finally deflated, but stocks still appear to be overvalued. While bonds have reached a fair value after a 50% decline caused by high interest rates, stocks remain priced at extremes that suggest future returns may be underwhelming for investors.

Although stocks are not as overvalued as they were two years ago when SPACs, NFTs, and meme stocks were popular, they are still in the overvalued zone. The 2022 bear market and recent correction have helped rein in valuations, but NDR remains skeptical that equities represent a good deal for investors.

Various valuation metrics support this viewpoint. Stocks have outpaced the growth in money supply, as indicated by the M2 gauge. The price-to-earnings ratio of the S&P 500 using five-year earnings also suggests that stocks are still overvalued. These charts, which go back to the 1920s, indicate a bubble in stocks.

Furthermore, when compared to the returns offered by bonds, the stock market appears even more overvalued. US households are still overweight in stocks, with nearly 40% owning stocks, well above the long-term average. On the other hand, households hold underweight allocations in real estate, bonds, and cash, with cash being the most underweight relative to historical norms.

These readings indicate that if US households decide to shift their money away from stocks, they could be the biggest losers, potentially leading to further declines in valuations.

In summary, while the "everything bubble" of 2021 may have deflated, stocks still appear to be overvalued according to Ned Davis Research. Various valuation metrics and the comparison to bond yields support this view. US households' overweight position in stocks and underweight position in other assets also suggest potential risks for stocks if investors decide to reallocate their investments.


More from Press Rundown