Indicator Shows Stock Market Most Overvalued Since Dot-Com Bubble Crash

• The stock market is the most overvalued its been since the dot-com bubble crash, according to Ned Davis Research.
• The research firm highlighted the relationship between the S&P 500’s earnings yield and interest rates.
• High cash yields have sparked a rush for money market funds, which have attracted more than $1 trillion from investors since March 2022.

Our Chart of the Day is from Ned Davis Research and highlights that the stock market is incredibly overvalued based on one indicator.

The research firm noted the relationship between the S&P 500 earnings yield relative to cash yields, and found that the stock market is the most overvalued it’s been since the aftermath of the dot-com bubble crash.

The S&P 500 earnings yield is the reciprocal of the price-to-earnings ratio and helps investors understand how much company earnings they will receive for each dollar invested in the market.

The Federal Reserve’s rate-hiking cycle that began in March 2022 drastically altered the valuation picture.

“Since the Fed started raising interest rates last March, the S&P 500 GAAP earnings yield/three-month Treasury yield has gone from stocks being on the verge of extremely undervalued to being the most overvalued since the aftermath of the dotcom bubble,” NDR said. 

In other words, it’s not that stocks have soared to unrealistic heights, but compared to cash, they don’t appear as valuable.

With investors being able to earn north of 5% on their cash, stocks aren’t as attractive as they might be in a low-interest-rate environment. This has led to a surge in assets flowing into money market funds, which collected more than $1 trillion from investors since March 2022.

“Investors are clearly comparing stocks to cash and liking what they see in cash,” NDR said.