Stocks look expensive: should you really buy now?

The S&P 500 (^GSPC 0.90%) has gained more than 20% so far this year as this bull market charges forward. While there were some pullbacks along the way, the overall mood among investors was positive as they anticipated lower interest rates and rushed to get into artificial intelligence (AI) stocks on a big rally. In fact, AI stocks have led this entire move, climbing double- and triple-digit percentages since the start of 2024. Other growth stocks have also gained momentum as investors bet on better times ahead.

This, of course, translated into gains for many investors’ portfolios. But there’s a downside that comes with that kind of growth: stocks today are generally much more expensive by common valuations than they were earlier this year, meaning if you buy now, you’re getting less of a bargain . . With that in mind, should you really be buying stocks today?

Image source: Getty Images.

Companies that power today’s economy

First, let’s take a look at the average stock valuations in the S&P 500 — a good benchmark because the benchmark includes the companies responsible for most of the value in the US stock market. The most useful valuation measures—which determine whether a stock is cheap or expensive—generally look at a company’s earnings (past or projected) relative to its current stock price.

However, to get a clearer picture, I suggest using the S&P 500 Shiller CAPE ratio, as it measures a stock’s price relative to the company’s inflation-adjusted earnings over a 10-year period to truly capture long-term performance of that company. (CAPE stands for “Cyclically Adjusted Price-to-Earnings.” )

Now, we’ll look at the S&P 500’s valuation levels by this measure during today’s bull market, compared to its valuations in the last 10 bull markets dating back to 1957. The measure is at about 35 today, and the chart shows that the U.S. mari- cap stocks were more expensive in only two other periods during that 67-year period.

S&P 500 Shiller CAPE Ratio data by YCharts.

Notably, over the past 20 years, the average reading for this value has been in the mid-20s.

So the stock is pretty richly valued right now, at least compared to historical levels. Now, back to our question. Should you really be buying stocks in such an environment? After all, stocks at these levels could suggest a correction ahead — and besides, it’s generally preferable to pay fair prices for stocks rather than top dollar.

You can still find bargains…

Before you throw in the towel — even temporarily — on your investment, keep a few things in mind. First, just because the market in general is expensive doesn’t mean every stock is. For example, trading at 10 times forward earnings estimates, the healthcare giant Pfizer looks like a business today. So does the e-commerce company Etsytrading at 11 times forward earnings estimates.

When investing, it’s critical to stay in the market over multiple cycles and look at stocks individually — that way, you won’t miss opportunities.

Second, even if the market pulls back at some point and a stock you just bought goes down, that shouldn’t be a disaster for your portfolio if you’re investing for the long term. Short-term gains or losses won’t make much of a difference to your overall return if you hold on for five or 10 years or more — and a long-term strategy means you’ll have plenty of time to benefit from a companies. growth over time.

Of course, with the S&P 500 Shiller CAPE ratio in mind, you’ll want to stay vigilant when considering which stocks to buy right now. Quality companies that have become overpriced might be the ones to add to your watch list in the hope that you can catch them at some point in the future when their valuations look more reasonable. In the meantime, keep investing, because not the entire market is overpriced. There are great opportunities waiting for you, and the earlier you get into these stories, the more you’ll benefit as they progress over time.