{"id":23779,"date":"2021-01-21T02:42:36","date_gmt":"2021-01-21T02:42:36","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=23779"},"modified":"2021-01-21T02:42:36","modified_gmt":"2021-01-21T02:42:36","slug":"sp-500-bubble-risk","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2021\/01\/21\/sp-500-bubble-risk\/","title":{"rendered":"S&#038;P 500 bubble risk"},"content":{"rendered":"<p>S&amp;P 500 valuations are higher than the 1929 (Black Friday) Wall Street crash and the October 1987 (Black Monday) crash. The Dotcom bubble is the only time in the last 120 years that the ratio between Price and highest trailing earnings (PEmax) was higher.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-01-21-pemax.png?w=525&#038;ssl=1\" alt=\"S&amp;P 500 PE of Highest Trailing Earnings (PEmax)\" \/><\/p>\n<p>PEmax eliminates distortions in the price\/earnings multiple caused by sharp falls in earnings during recessions. The current multiple of 26.93 compares the index at December 31, 2020 to highest trailing earnings of 139.47 (for the 12 months ended December 2019) rather than expected earnings of 95.22 for the 12 months ended December 2020. Highest trailing earnings in such a case are a far better reflection of future earnings potential than more recent results.<\/p>\n<h2>Payback model<\/h2>\n<p>Using our <a href=\"https:\/\/thepatientinvestor.com\/index.php\/payback-period\/\">payback valuation model<\/a>, we arrive at a fair value estimate of 2331 for the S&amp;P 500 based on:<\/p>\n<ul>\n<li>highest trailing earnings of 139.47;<\/li>\n<li>a long-term growth rate of 5% (the highest nominal GDP growth achieved in recent years was 6.0% in Q2 2018); and<\/li>\n<li>a payback period of 12 years \u2014 normally only used for stable companies with a strong defensive market position.<\/li>\n<\/ul>\n<p>The LT growth rate required to match the current index value (3851) is 12.0%. The only time such a growth rate was achieved, post WWII, is in the 1980s, when inflation was in double-digits.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-01-21-gdp-cpi.png?w=525&#038;ssl=1\" alt=\"Nominal GDP &amp; Inflation (CPI)\" \/><\/p>\n<h2>Conclusion<\/h2>\n<p>Stock prices are in a bubble of epic proportions. Risk of a major collapse remains elevated.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>S&amp;P 500 valuations are higher than the 1929 (Black Friday) Wall Street crash and the October 1987 (Black Monday) crash. The Dotcom bubble is the only time in the last 120 years that the ratio between Price and highest trailing earnings (PEmax) was higher. PEmax eliminates distortions in the price\/earnings multiple caused by sharp falls &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/thepatientinvestor.com\/index.php\/2021\/01\/21\/sp-500-bubble-risk\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;S&#038;P 500 bubble risk&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[57,34],"tags":[4680,3766,3010],"class_list":["post-23779","post","type-post","status-publish","format-standard","hentry","category-stock-markets","category-us-canada-countries-regions","tag-highest-trailing-earnings","tag-pemax","tag-sp-500"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>S&amp;P 500 bubble risk - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"S&amp;P 500 bubble risk - the patient investor\" \/>\n<meta property=\"og:description\" content=\"S&amp;P 500 valuations are higher than the 1929 (Black Friday) Wall Street crash and the October 1987 (Black Monday) crash. The Dotcom bubble is the only time in the last 120 years that the ratio between Price and highest trailing earnings (PEmax) was higher. 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He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters. Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis. Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008\\\/2009 and 2020 bear markets well ahead of actual events. 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He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.","sameAs":["https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/","https:\/\/www.instagram.com\/colin_thepatientinvestor","https:\/\/au.linkedin.com\/in\/colintwiggs"],"url":"https:\/\/thepatientinvestor.com\/index.php\/author\/investor\/"}]}},"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9tQ4n-6bx","jetpack_likes_enabled":false,"jetpack-related-posts":[{"id":21187,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/08\/07\/sp-500-pemax-at-24\/","url_meta":{"origin":23779,"position":0},"title":"S&#038;P 500 PEmax at 24","author":"Colin Twiggs","date":"August 7, 2020","format":false,"excerpt":"The S&P 500 is way over-priced based on all three earnings multiples. 75% of companies in the S&P 500 have already reported earnings, so we have a good idea as to what overall earnings will be for the second quarter. Based on the latest index price of 3349.16, trailing PE\u2026","rel":"","context":"In &quot;Stock Markets&quot;","block_context":{"text":"Stock Markets","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/stock-markets\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":16039,"url":"https:\/\/thepatientinvestor.com\/index.php\/2017\/12\/09\/cape-v-pemax-how-hot-are-market-valuations\/","url_meta":{"origin":23779,"position":1},"title":"CAPE v PEMAX: How hot are market valuations?","author":"Colin Twiggs","date":"December 9, 2017","format":false,"excerpt":"Robert Shiller's CAPE ratio is currently at 32.17, the second-highest peak in recorded history. According to multpl.com, prior to the Black Tuesday crash of 1929 CAPE had a reading of 30. The only peak with a higher reading is the Dotcom bubble at 44. Click here to view at multpl.com.\u2026","rel":"","context":"In &quot;Quotes&quot;","block_context":{"text":"Quotes","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/quotes\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":26535,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/06\/26\/sp-500-and-the-fed-taper\/","url_meta":{"origin":23779,"position":2},"title":"S&#038;P 500 and the Fed taper","author":"Colin Twiggs","date":"June 26, 2021","format":false,"excerpt":"S&P 500 earnings forecasts show a sizable jump in the March quarter (97.3% reported) followed by a weaker June quarter as the economy struggles with supply chain interruptions and labor shortages. Record operating margins of 13.0% estimated for the first quarter (March '21) are unlikely to be repeated. The average\u2026","rel":"","context":"In &quot;GDP and Activity&quot;","block_context":{"text":"GDP and Activity","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/gdp-and-activity\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":23296,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/12\/19\/stock-prices-jay-powell-is-talking-through-his-hat\/","url_meta":{"origin":23779,"position":3},"title":"Stock prices: Jay Powell is talking through his hat","author":"Colin Twiggs","date":"December 19, 2020","format":false,"excerpt":"Daily COVID-19 cases in the US continue to climb, reaching 236,211 on Thursday 17th. Unemployment claims jumped by 1.6 million in the week ending November 28, exceeding more than 1 in 8 of the total workforce (Feb 2020). Initial claims under state programs climbed to 935,138 (unadjusted) by week ending\u2026","rel":"","context":"In &quot;Deficit Spending &amp; Employment&quot;","block_context":{"text":"Deficit Spending &amp; Employment","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/deficit-spending-employment\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":24409,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/03\/06\/sp-500-warns-of-elevated-risk\/","url_meta":{"origin":23779,"position":4},"title":"S&#038;P 500 warns of elevated risk","author":"Colin Twiggs","date":"March 6, 2021","format":false,"excerpt":"The S&P 500 rallied Friday despite rising long-term Treasury yields. Troughs in 21-day Volatility above the 1.0% level continue to warn of elevated risk. The price-earnings multiple based on highest trailing earnings (PEmax) has climbed to 27.55. The second highest peak in the past 120 years. Conclusion We continue to\u2026","rel":"","context":"In &quot;Stock Markets&quot;","block_context":{"text":"Stock Markets","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/stock-markets\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":37419,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/09\/13\/sp-500-rallying-but-risks-remain\/","url_meta":{"origin":23779,"position":5},"title":"S&#038;P 500 rallying but risks remain","author":"Colin Twiggs","date":"September 13, 2022","format":false,"excerpt":"The S&P 500 is rallying, with a higher trough suggesting another test of resistance at 4200\/4250. But valuations warn that stock prices are still elevated, with Market Capitalization\/GDP -- Warren Buffett's favorite valuation measure -- falling to 2.14 in Q2, compared to the long-term average of 1.03. The price-to-sales ratio\u2026","rel":"","context":"In &quot;US &amp; Canada&quot;","block_context":{"text":"US &amp; Canada","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/us-canada-countries-regions\/"},"img":{"alt_text":"S&P 500","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-09-12-spx.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-09-12-spx.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-09-12-spx.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/23779","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=23779"}],"version-history":[{"count":2,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/23779\/revisions"}],"predecessor-version":[{"id":23905,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/23779\/revisions\/23905"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=23779"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=23779"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=23779"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}