COLUMBUS, Wis., March 25, 2025 /PRNewswire/ — As of March 18, 2025, recent data suggests that the U.S. stock market may be overvalued based on fundamental metrics. With the S&P 500 Price-to-Earnings (P/E) ratio at 26.574, it is notably above the 20-year average of 16.24, signaling potential overvaluation. This raises concerns about future market performance.
Key Metrics Highlight Potential Risk
- The S&P 500 Price-to-Book Value as of March 14, 2025, stands at 4.8. Historically, the Price-to-Book Value has ranged from a low of 1.46 to a high of 5.27, with a median value of 2.86. Current levels suggest the market is above the high end of its typical range (2.96 to 4.38).
- The Buffett Indicator, which compares the total market value to U.S. GDP, currently sits at 211%. This ratio is calculated by dividing the Total Value of the stock market $62.29 Trillion by the total GDP $29.55 Trillion. This indictor currently sits art approximately 66.99% above the historical trend line, indicating the stock market may be “strongly overvalued” relative to the size of the U.S. economy.
Additionally, concerns are rising about the state of the retail sector, with 7,400 retail closures in 2024 and 4,000 more already in 2025, the trend is not favorable. Small investors, who have been the main source of market support, may soon face mounting challenges. The rising cost of goods and services has dampened their purchasing power causing consumers to allocate more of their income toward making ends meet then investing through 401Kplans or other such accounts. Furthermore, full-time job availability has been declining since 2022, and the number of hours worked has also dropped to a 15-year low to 34.5 hours per week, also putting pressure on take home pay for American workers.
In the past few years unemployed or under employed people turned to gig economy jobs to fill the income gap. However, gig economy jobs, such as those with Uber, are paying less than they did just a few years ago, further straining household budgets. With fewer hours worked and increased economic uncertainty, small investors may soon find it harder to continue supporting the stock market.
Given the current environment, Michael Eisenga, recommends investors consider shifting their focus to long-term bonds. The 30-year U.S. Treasury bond offers a yield of just above 4.5%, a significant improvement from the 1.2% yield available in June 2020. With the Federal Reserve expected to begin cutting interest rates in the coming months, the value of these bonds could increase substantially, with potential principal appreciation of nearly 50% even if rates fall as to around 3% which he believes is possible in the next 12 to 24 moths.
“For those seeking stability and long-term returns, I believe the long bond is a strong investment option,” said Eisenga. “In the current climate, with economic uncertainty on the rise and equity valuations stretched, securing a steady yield and potential for bond appreciation could prove to be a sound strategy.”
While inflation has dominated headlines in recent years, the data suggests inflationary pressures are receding. Oil and gas prices have dropped, and core inflation indicators such as new rents are reflecting much lower levels. According to Trueflation (based on 30 million real price points being tracked on a daily basis) real inflation has decreased from over 11% in June 2022 to below 1.4% today. Meanwhile, the slowdown in service spending and job losses reported by Challenger (172,000 jobs lost in February) indicate that a disinflationary trend may be underway.
With retail investors facing increased difficulty and Baby Boomers less able to re-enter the workforce to make up for lost interest income on retirement savings, the outlook for equities in the near term appears bumpy. In addition, government projections suggest net interest payments on the Nation Debt will reach nearly $1 trillion in 2025, compared to less then half that just 3 years ago, underscoring the need for substantial rate cuts in the future.
While equities may face a rough road ahead, the Federal Reserve’s likely pivot toward rate cuts could provide opportunities for those seeking more secure investment options. Investors are advised to approach the market with caution, with a preference for assets that offer stability and return, such as long-term bonds.
SOURCE Mike Eisenga
