S&P 500 Valuation: Expensive by Historical Standards Yet Relative Improvement Noted

Today's U.S. stock market valuations are among the priciest on record.However, when considering the context of the market's peak in early January 2022, stocks may present relatively better value now.

Despite this, the current valuation may not fully reflect how costly stocks have become, especially given that the ratio has remained above 20 for long periods in the past.

A comparison of today's stock market valuation against what prevailed at the height of the bull market on January 3, 2022, reveals that in almost every instance, the market is not as overpriced now as it was two years ago. The exception is the price/earnings ratio based on the trailing 12 months as reported earnings: It is higher today than at the January 2022 market peak.

It's worth noting that the market in early 2022 was extremely overvalued,so investors shouldn't make too much of the valuation improvement in the case of the other eight indicators. For example, the Cyclically Adjusted P/E (CAPE) ratio, which has seen one of the most notable declines over the last two years—to 32.6 from 41.1—still ranks above 90.1% of all monthly measurements since 1881, as per the database maintained by Yale University's Robert Shiller.

Looking ahead, questions remain regarding the market's capacity for further multiple expansion. Can earnings growth sustain an upward price trajectory, and can the market justify its current valuations? The answer may hinge on various factors rather than a singular cause.