Is the high-flying U.S. stock market more expensive than you think? You bet it is — if you measure it by the “median” price-to-earnings ratio of stocks listed on the New York Stock Exchange.
That warning comes courtesy of Jim Paulsen, chief investment strategist at Wells Capital Management. And it comes on the heels of a wild ride to start 2015, with the Dow Jones industrial average plunging 461 points Monday and Tuesday, and then rallying 536-points in a two-day surge Wednesday and Thursday. The blue-chip stock gauge is trading less than 1% off its Dec. 26, 2014, all-time closing high of 18,053.71.
Paulsen points out that while the average P-E of the benchmark Standard & Poor’s 500-stock index (the valuation metric most widely used by Wall Street) kicked off 2015 trading at about 18 times trailing 12-month earnings — which is “slightly above average” but far below its post-war record of more than 30 times earnings in early 2000 — viewing valuation through another lens points to a far more pricey stock market.
Indeed, the median P-E of NYSE-listed stocks (there are nearly 4,000 listed securities on the NYSE) is slightly more than 20 times earnings. That is an “all-time, post-war record high,” says Paulsen, adding that the median NYSE stock is also at a record high relative to cash flow and near a record high relative to book value. (Median means half of the NYSE stocks are trading at higher P-Es and half are trading at lower P-Es.)