October 27, 2025 Some thoughts on stock market valuation

The situation on the stock market is characterized by a great deal of uncertainty. These include geopolitical, economic, and debt-related factors, as well as tariffs. While the risks are certainly higher than in more “normal” times, the stock market valuation is not as excessive as many claim.

Let’s share a few thoughts on the subject of valuation. Firstly, it should be noted that there are different yardsticks used for valuing stocks and stock markets. These range from simple ratios such as price-to-book (P/B), price-to-revenue (P/S), and price-to-earnings (P/E), to more sophisticated ones such as Enterprise Value-to-market capitalization (EV), PE-to-growth (PEG), the Schiller P/E-ratio (cyclically adjusted), or discounted cash flow (DCF) models. We consider some of the mentioned ratios to be of limited significance, such as simply comparing price to asset or gross value. One example is the famous Buffett Indicator, which is the ratio of the total value of the U.S. stock market to GDP. Warren Buffett called it "the best single measure of where valuations stand at any given moment." It is currently quoting at a frightening all-time high of 220%, much higher than at the dot-com bubble. However, as with all such ratios and models, it is not necessarily an accurate predictor of future stock market performance. On the eve of the financial crisis, for instance, the ratio stood at a modest 85%. Furthermore, it represents a ratio of gross figures and does not take into account productivity and profit development, both of which can be decisive, especially in times characterized by new technologies.

And, of course, these key figures must not be viewed in isolation; in particular, the level and development of returns from competing investments, especially the yield on government bonds, must be included in the analysis. However, this is not a tutorial on value theory, but rather a discussion of the simple figures used by practitioners. To assess the current stock market valuation, we therefore use a somewhat simple formula, but one that at least includes the forward-looking net profit: the ever-popular P/E-ratio.

We are focusing on the U.S. market, where valuation measures currently appear high. Many observers are warning of a situation similar to that which prevailed before the dot-com bubble burst in 2000. The current P/E-ratio of the S&P 500 is 25. However, excluding the Information Technology and Communication segments (with a P/E of 27), which were driven by groundbreaking AI developments, brings the P/E of the broad market down to 19.

Compared to the dot-com period, all ratios still look quite reasonable. A recent analysis by a renowned research firm shows that the valuations of the big leading tech companies are not excessive, given their growth potential.  The current P/E-ratio of the Magnificent 7 Aggregate is 27; the P/E of the Tech Bubble Leaders Aggregate in 2000 was 52. By the way, in 1999 the P/E of the whole S&P500 was an amazing 123 (based on trailing twelve months earnings), today the same ratio is 30.

We do not want to gloss over the current situation. A correction can always happen, but in times of low and falling interest rates, prices will soon recover. Furthermore, the fact that so many are warning of risks, and some even foresee a crash, could lay the groundwork for a nice year-end rally.