Investors buy stock in corporations because the corporations earn profits. Investors expect to benefit from those profits by selling the stock for more than they paid for it, or by receiving dividends, or both. |
According to conventional wisdom, the latest "bubble" in American stock prices burst in the spring of 2000. Unfortunately, a glance at the numbers suggests that the stock market is just as overvalued now as it was then.
As you can see from the following chart, on the average, American stocks usually trade for between 10 and 20 times their current earnings.
According to this precedent, recent stock prices are enormously overvalued.
These two charts don't correspond exactly. Bigcharts.com and lowrisk.com may be using different estimates for market-wide earnings numbers or a different formula for computing the relevant moving average. But regardless, both sources agree that the market-wide price/earnings ratio is still far above and outside its normal range.