Just How Overextended Is The US Stockmarket?

How overextended is the stock market? Here's a visual aid - Chart 1.

From 2009 to the present S&P 500 has been in a seminal bull market producing a compounded annual growth rate (CAGR) of 16%; as of today it is at an all time high of 3915. Yes, there have been a couple of sharp corrections, but no extended bear market. How does this performance compare with long term returns? 

 

  Chart 1

Firstly, the 60 year average CAGR is 7.27%, while since 1975 it has been 9.73%.

To give us perspective, I have annotated the S&P chart with levels where the index would be today if CAGR since 2009 was at various CAGRs:  7.27%, 10%, 12% and 14%.  In other words, a reversal to a 10% return would place S&P at 2071 - even a 14% return (almost double the long term average) would place it at 3180.  If it were to return to its average since 1975 (10%) it would be at 2071.

In time terms, S&P would have to stay at its present level of 3910 until 2027 to revert to 10% CAGR   or 2033 to revert to its long term of 7.27%.

Let's do another, very short term CAGR calculation: from its bottom on March 2020 to today the CAGR is 91%. Even if we totally ignore last year's pullback and take the previous high of 3400 points as a starting point, today's level still produces a CAGR of 15% !

So, yes, the market is overextended and due for a pullback and/or a pause of some years.

From yet another perspective, S&P has outperformed European markets by a very large margin - Chart 2.  

Chart 2

There are many other fundamental metrics which show a market that has run way ahead of itself: forward P/Es, total market capitalization to GDP, dividend yield, etc.  A student of crowd psychology, however, would be far more interested in this: retail investors currently make up 25% of the market's activity versus just 10% in 2019.