Stock market pricing indicates whether stocks are cheap or expensive in relation to earnings. It is a poor indicator of market timing, but good at predicting long-term investment returns. High valuations warn of low investment returns over the next decade, and low valuations indicate an opportunity for above-average returns over a similar period.
Stock Pricing
US stock pricing remains at extreme levels. We changed the composition of the Forward PE and Price-to-Sales indicators at the end of April 2026, so earlier highs are not directly comparable.
We use z-scores to measure each indicator’s current position relative to its historical data, with results expressed in standard deviations from the mean. We then calculate an average of the five readings and convert that to a percentile. The higher the stock market price measure is relative to the historical mean, the greater the risk of a sharp drawdown.
Buffett Indicator
Warren Buffett’s favorite long-term measure of stock market valuation provides a stable valuation ratio largely unaffected by fluctuating profit margins.
The ratio of stock market capitalization to GDP is more than double its long-term average of 1.2. Buffett considers values above 2.0 to indicate that stock prices are dangerously high.
Dow Jones Industrials Price-to-Sales
We use a 20% trimmed mean of the Price-to-Sales ratio across the 30 stocks in the Dow to remove the most extreme readings that would otherwise distort the ratio.
The change in the Dow Jones index composition on June 29, 2026 may have contributed to the recent jump, when Alphabet Inc. (GOOGL) replaced Verizon (VZ) in the index.
Dow Jones Industrials Forward PE
The Forward PE for stocks in the Dow Jones Industrial Average uses a 20% trimmed mean to mitigate the impact of outliers.
Shiller CAPE
Robert Shiller’s CAPE smoothes out business-cycle effects by comparing the S&P 500 index to a 10-year average of inflation-adjusted earnings.
The current advance on the CAPE ratio is the second-highest in history, behind only the Dotcom bubble in 1999-2000, with values far above their long-term average of 22.4.
PE of Highest Trailing Earnings
The S&P 500 Price-Earnings (PE) ratio, based on the highest trailing earnings, remains high when compared with the long-term average of 17.3.
Conclusion
The extreme pricing indicates an elevated risk of a significant drawdown.
Related Links
Acknowledgments
- Prof. Robert Shiller: CAPE 10 Data
- Federal Reserve of St Louis: FRED Data
- Morningstar: Dow Jones Industrial Average Data