Stocks are overvalued on a price-earnings basis, says economist David Rosenberg of Gluskin Sheff + Associates.
And it’s not a mild overshoot: 35 percent.
“According to the Shiller P/E ratio, the S&P 500 is now 35 percent overvalued — a full one standard deviation event,” the former Merrill Lynch chief economist wrote in a report obtained by Business Insider.
The inflation-adjusted P/E ratio, based on 10-year trailing earnings, rose to 22 in April from 21 in March.
“This is not nosebleed territory, but it is expensive; the historical average is 16.4,” Rosenberg writes. “So, this implies that the market is currently 34.7 percent overvalued.”
From the current level of 1,205, a 35 percent drop by the S&P 500 Index would take it to 783.
“It would be nice to say that a higher-than-normal P/E is justified by low inflation and low interest rates,” Rosenberg writes.
“But frankly, real bond yields are not that far from their long-run averages; however, equity valuation is, and something is going to give at some point.”
He recommends defense, income-oriented investment strategies now.
Some experts see a host of reasons why stocks should drop.
“Greece is back in the headlines,” Joseph Saluzzi, of equity trading at Themis Trading, told Bloomberg.
“At some point, we’d see the deficit concern coming back to haunt us. . . . Stock prices have run too far and you’d need to have earnings to support them.”
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