Ned Davis Research
According to Ned Davis Research (NDR), the stock market is more overvalued than it has been since the dot-com bubble burst.
The research firm highlighted the relationship between the S&P 500 earnings yield and interest rates.
The high cash returns have sparked a run on money market funds, in which investors have invested more than $1 trillion since March 2022.
This is a machine translation of an article by our US colleagues at Insider. It was automatically translated and checked by a real editor. We welcome feedback at the end of the article.
The chart you see in the image above is from Ned Davis Research (NDR) and shows that the stock market is incredibly overvalued based on one indicator.
The research firm examined the relationship between the S&P 500’s earnings yield and cash returns and found that the stock market is more overvalued than it has been since the dot-com bubble burst.
The S&P 500 earnings yield is the reciprocal of the price-to-earnings ratio and helps investors understand how much corporate earnings they will receive for each dollar invested in the market.
The Federal Reserve’s interest rate hike phase, which began in March 2022, has drastically changed the valuation picture.
Cash more valuable than stocks?
“Since the Federal Reserve raised interest rates last March, the relationship between the S&P 500 GAAP earnings yield and the three-month Treasury yield has moved from extreme undervaluation to the highest overvaluation since the end of the dot-com bubble.” , according to NDR.
In other words, it’s not that stocks have risen to unrealistic levels, but they don’t seem as valuable compared to cash.
Since investors can earn a return of over five percent on their cash, stocks are not as attractive as they could be in a low interest rate environment. This has led to a surge in inflows into money market funds, which have raised more than $1 trillion from investors since March 2022.
“Investors are clearly comparing stocks with cash and like what they see in cash,” said NDR.
This text was translated from English. You can read the original here.