The Buffett Indicator Model: Overvalued

The total US stock market is worth $43.9T, the current GDP estimate is $26.2T, for a Buffett Indicator measure of 167%. This is 1.0 standard deviations above the historic trend of 129%. We consider this Overvalued.

GDP isn't going to change much year over year. Maybe up 0-3%. To go from 167% -> 129%

43.9t / 26.2t = 1.67

x / 26.2t = 1.29

x would be 33.79t

“stock market worth/valuation” 43.9t -> 33.79t would be a 23% decline

SPX going down 23% from current levels would be 3045

valuation would be fair at: 3045

The Price/Earnings Model: Overvalued

The current CAPE ratio is 29.1. This is 44% above the long-term historic trend CAPE of 20.2, or approximately 1.1 standard deviations above trend. We consider this Overvalued.

CAPE = Shiller P/E or PE 10 Ratio: Overvalued

Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10

What is the P/E 10? How is it calculated?: Look at the yearly earning of the S&P 500 for each of the past ten years. Adjust these earnings for inflation, using the CPI (ie: quote each earnings figure in 2023 dollars) Average these values (ie: add them up and divide by ten), giving us e10. Then take the current Price of the S&P 500 and divide by e10.

Shiller PE Ratio = Current Share Price ÷ Inflation Adjusted Earnings, 10-Year Average

CAPE needing to go down 44% would rely on a mixture of inflation coming down (not going to happen in any significant/measurable portion for at least 6 months?), earnings to come down (slowly happening each quarter as tech companies readjust for current economic climate/consumer spending), and prices to come down valuation wise.

28.71 = share price / x
28.71 = 3973 / x
inflation adjusted earnings 10 year average = 138.384

if the divisor stayed the same, share price would be 2795

if divisor changed by 10%, share price = 3074

if divisor changed by 20%, share price = 3354

if divisor change by 30%, share price = 3633

valuation would be fair at: 2800-3600

S&P500 Mean Reversion Model: Overvalued

The S&P500 is at $4,079, or approximately 39% above its exponential historic trend line. We consider this Overvalued.

Does this mean SP500 needs to correct 39% to be considered fairly valued?

valuation would be fair at 2488

The Yield Curve Model: Strongly Overvalued

The 10-year Treasury rate is 3.82% and the 3-month is 4.84%, for a spread of -1.02%. Since 1950 the historic average spread has been 1.51%. The current spread is 2.2 standard deviations above the historic trend. We consider this Strongly Overvalued.

What's more likely: the 10 year going up (as people think rates will stay higher longer) or the 3 month coming down (as people think rates will come down in the next 12-18 months)

We need a 2.53% change (spread between the 10Y and the 3 month) in the spread to get back to the historical average.