With Valuations Hitting New Cycle Highs, Should Investors Avoid Stocks? (Part 1 of 4)

As the S&P 500 makes new all-time highs, there has been a great deal of debate this year among investors, analysts, and in the press whether stocks are poised to decline due to high valuations. The exact valuation multiple depends on how the Price / Earnings (P/E) ratio is measured on stocks (earnings can be measured as Adjusted vs. GAAP, Trailing vs. Next Twelve Months), but the thought process is usually the same—stocks are now too expensive at more than 22x trailing P/E (see chart below) or more than 18x forward P/E. Those that warn investors to “sell stocks” say that these types of high multiples were reached just before prior bear markets (e.g. in 2000 or 1929), and because equities declined in the years following those periods, that means today equities are similarly risky and should be avoided. So, should investors sell stocks and get out of the market?

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