Is the Stock Market Overvalued in 2025? | The Informed Investor 8

Episode 8: Is the stock market expensive or a good value?

Stock valuation ratios, which measure stock prices against a financial metric like a company's earnings or book value, offer investors some information about the expected returns of the market or individual stocks at any point in time.

If a valuation ratio, literally the price divided by the financial metric, is considered elevated relative to a historical average or another comparative number, some investors may worry that stocks are too pricey. Alternatively, if valuation ratios are considered attractive, investors might see stocks as a good buy.

However, investors may not realize that aggregate stock market valuation ratios have not been strong predictors of future returns in the broad market.

Valuation measures such as the cyclically adjusted price-to-earnings (CAPE) ratio are frequently portrayed as indicators that assess whether the stock market's expected return has increased or decreased. Yet, there isn't much evidence showing that such indicators are useful for investors' asset allocation decisions.

Equally noteworthy is that eye-popping returns for the market's most high-flying stocks, the companies that often carry high valuations, typically tend to occur before those companies reach the top of the market. Once there, subsequent returns tend to lag the market.

This is a cautionary tale for investors expecting continued outperformance from big-name technology stocks or continued underperformance from so-called value stocks. That may or may not happen—nothing is guaranteed.

While ample evidence suggests emphasizing stocks with low price-to-book ratios has been a reliable approach for investors seeking outperformance versus the market over the long haul, we don't know when (or if) that outperformance might occur. What we do know is that, in general, stocks are priced to have a positive expected return.

In Episode 8 of The Informed Investor, Dimensional's Mark Gochnour, Head of Global Client Services, Wes Crill, Senior Client Solutions Director, and Jake DeKinder, Head of Client Communications, dive into current debates about market valuations in an attempt to separate the signals from the noise.

LINKS FROM TODAY'S EPISODE:

The Informed Investor on YouTube https://youtube.com/playlist?list=PLCyJr6FFig-h1mA7rVP7Mbk0irFw2wA90&si=Luthpbg9WwkhMVbi

Mark Gochnour on LinkedIn https://www.linkedin.com/in/mark-gochnour-9a23598a/

Wes Crill on LinkedIn https://www.linkedin.com/in/wes-crill-77a49417/

Jake DeKinder on LinkedIn https://www.linkedin.com/in/jake-dekinder-cfa-4105b98/

Learn more at https://www.dimensional.com/