The S&P 500 Hasn't Looked This Cheap Based on a Popular Metric in Decades. Should You Buy Stocks Now?
Stocks might not be as expensive as they first appear.
The S&P 500 (SNPINDEX: ^GSPC) may appear undervalued today, despite trading near an all-time high. Analysts have raised concerns about concentration among high-growth stocks, many of which boast high valuations relative to earnings. The Buffett indicator, which compares the total market cap of U.S. stocks to the country's GDP, is sky-high.
The CAPE ratio (cyclically adjusted price-to-earnings) is also at levels last observed during the dot-com bubble's peak. Yet, stock prices are expected to mirror the future earnings or cash flows generated by the companies they represent. In this light, stocks seem cheaper than they have been in at least 31 years. As of this writing, the S&P 500's price/earnings-to-growth (PEG) ratio, which compares the forward price-to-earnings (P/E) ratio to earnings growth expectations, is approximately 0.7.
Famed investor Peter Lynch once suggested that a PEG ratio below 1 signifies the market undervaluing a stock. The S&P 500 PEG ratio has fallen below 1 only four times since 1995. Today, it appears the market is undervaluing the entire U.S. large-cap market to the greatest degree ever recorded. Should investors seize the moment and start buying stocks en masse?
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