The Market is Overvalued. So What?
Welcome to issue #21 of The Davem Dish. Every two weeks I share what actually works in investing based on my 20 years of wins, losses and expensive lessons. You’ll also get my thoughts on solopreneurship and life in general because the same principles apply — keep it simple, stay consistent and focus on what matters.
What Does “Overvalued” Even Mean?
A subscriber recently asked me:
“I often hear the market or XYZ company is overvalued. What does this mean and does it even matter?”
Turn on financial media for five minutes and you’ll hear the chorus of valuation speak.
“The market is overvalued.”
“Stocks are trading at historically elevated levels.”
“The Shiller PE is flashing warning signs.”
This has been the background noise for most of my investing journey — since the dot-com bubble days. It sounds serious and something you should pay attention to.
But people have been saying this for over two decades. And they’ve been wrong most of the time.
A Quick Primer
Let’s start with the basics. There are many ways to value a company or the market.
The easiest and most common way is the Price-to-Earnings ratio, or P/E.
It’s simple math. Take the price of a stock (or index) and divide it by its earnings per share. A P/E of 30 means investors are paying $30 for every $1 of earnings. A P/E of 10 means they’re paying $10. Lower is supposedly “cheaper” and higher is supposedly “expensive.”
(Side note: Stocks with no earnings and negative P/Es can still rise, sometimes dramatically. A stock price reflects current earnings and future expected earnings — in theory. Prices also reflect hype and fear, which I’ll dig into in another post.)
The average P/E for the S&P 500 over the past 50 years is around 20. Right now, it’s trading at roughly 28. By this measure, the market is “expensive.”
And some stocks are extraordinarily expensive. The current P/E of PLTR 0.74%↑ is 246. It was double that last summer. The stock was also up +150% in 2025. Hype outweighed valuation concerns.
Enter the Shiller CAPE
There’s a more “sophisticated” version for measuring market valuation.
Nobel laureate Robert Shiller, a former professor of finance at Yale, developed the Cyclically Adjusted Price-to-Earnings ratio, or CAPE. Instead of using one year of earnings, it uses ten years of inflation-adjusted earnings. The idea is to smooth out the boom-and-bust cycles that can distort a single year’s numbers.
The historical average CAPE is around 17. But right now, it’s sitting at 38 — more than double the historical average.
The only other times the CAPE has been this high were 1929 (before the Great Depression) and 2000 (before the dot-com crash).
Seems concerning, right? A crash is coming — or is it?
Yes, CAPE was elevated before both crashes, but CAPE has also been elevated for most of the past 15 years with no crash. High CAPE doesn’t mean a crash will happen next week. Rather, and more likely, returns over the next decade may be lower than historical averages.
That’s a very different statement and one that still doesn’t tell you what to do today.
And Then There’s the PEG
Some investors looked at the P/E and said “but what about growth?” Enter the PEG ratio — the P/E divided by expected earnings growth rate. Popularized by Peter Lynch in the 1980s, a PEG of 1 supposedly means a company is fairly valued. Below 1 is cheap and above 1 is expensive.
Sounds simple but it’s also mathematically flawed.
Problems include:
The PEG assumes a linear relationship between growth and valuation (it isn’t).
It ignores the time value of money.
It depends entirely on growth estimates that are essentially guesses.
So we’ve got a market level valuation tool (CAPE), a company-level tool (PEG) and a tool that applies to both the market and individual companies (PE). Not one of them answers an important question — when does overvaluation matter?
The Timing Problem
In December 1996, Federal Reserve Chairman Alan Greenspan warned about “irrational exuberance” in the stock market. The CAPE at the time was around 28 — elevated by historical standards.
Greenspan was right. The market was overvalued and a crash did come.
But not before the market doubled over the following three years before it crashed.
If you sold in 1996 because the market was “overvalued,” you missed one of the greatest short-term bull runs in history. And when the crash finally came in 2000, stocks never fell as low as they were on the day Greenspan issued his warning.
Being right about valuation and being right about timing are two completely different things.
Here’s what should change how you think about this.
From 1954 to 1970, the U.S. stock market stayed continuously “overvalued” by historical standards. That’s 16 years.
From 2010 to today, the market has been “overvalued” by CAPE standards for almost the entire period. That’s 15+ years of people warning about elevated valuations while stocks marched higher.
The pattern is clear.
Markets can stay “overvalued” far longer than anyone predicts. And waiting for an index “fair value” has an enormous opportunity cost.
Every year you sit on the sidelines waiting for valuations to normalize is a year of compounding you’ll never get back.
Why the Old Rules Don’t Apply
The CAPE obsessed crowd also misses that the market they’re comparing to doesn’t exist anymore.
The S&P 500 of 1970 was dominated by industrial conglomerates, oil companies, and manufacturers. Profit margins were thin and capital requirements were enormous. Growth was slow.
Today’s S&P 500 is dominated by technology companies with 30-40% profit margins and global scale. Apple alone is worth more than the entire energy sector.
When Microsoft can generate $100 billion in annual profit with limited physical infrastructure, comparing its valuation to U.S. Steel in 1965 is meaningless. The composition of the market has fundamentally changed.
Higher-margin, higher-growth, capital-light businesses deserve higher multiples. A P/E of 25 for a company growing earnings at 15% annually is very different from a P/E of 25 for a company growing at 3%.
The historical averages that everyone cites include decades of a completely different market structure. Treating them as eternal benchmarks is an error.
Another factor that gets conveniently ignored is where else are you supposed to put your money?
In the 1970s and 1980s, the yield on 10-year Treasury bonds was as high as 15%. You could park your money in government bonds and earn a real return. Stocks had to compete with that.
For most of the 2010s and early 2020s, rates were near zero. Bonds paid nothing. Savings accounts paid nothing. The stock market became the only game in town for wealth creation.
When there’s no alternative, money flows into equities. When money flows into equities, prices rise. When prices rise, P/E ratios expand.
This isn’t irrational exuberance, it’s math.
Yes, interest rates have risen recently. But they’re still nowhere near the levels that made bonds a legitimate competitor to stocks for long-term wealth building. And for most investors — especially younger ones — equities remain the only realistic path to financial independence.
The Question That Actually Matters
“Is the market overvalued?” is a debate designed for cable news panels and financial podcasts. It generates views and gives people something to argue about.
But it has almost no practical application for individual investors who are buying individual stocks.
The S&P 500 is an aggregate of 500 companies with wildly different characteristics. Some are growing earnings at 30% annually while some are shrinking. Many have formidable balance sheets while others are drowning in debt. Some trade at P/Es of 10 and some at P/Es of 50.
Saying “the market is overvalued” tells you nothing about whether the specific stock you’re considering is a good investment at its current price.
A high-PE market can still contain attractively valued individual stocks. A low-PE market can still contain overpriced crap.
Instead, ask this:
Can this specific company, at this specific price, generate my minimum required return?
That’s a question you can actually answer, with again, some simple math. You estimate future earnings growth and calculate a fair value. You compare it to the current price. You look for entry points at technical support levels.
If the math works, you buy. If it doesn’t, you wait or move on.
This is exactly what I do with the Davem Method. I’m not trying to time the market or predict when valuations will “normalize.” I’m finding quality companies that can generate at least 15% annually — regardless of what the aggregate market is doing.
Some of the best investments I’ve made have been during periods when everyone was screaming about overvaluation. Because I wasn’t buying “the market.” I was buying specific businesses at specific prices that met my criteria.
What “Overvalued” Really Means
“The market is overvalued” is a socially acceptable way of saying “I’m scared to invest.” It sounds smarter than “I don’t know what to do.” It gives you permission to stay on the sidelines while feeling intellectually superior.
But paralysis isn’t a strategy and the market doesn’t care about your feelings.
The truth is that nobody — not Shiller, not Greenspan, or the talking heads on CNBC — can tell you when the market will correct. Valuations can stay elevated for years, even decades. And while you wait for the perfect entry point, the wealth-creation engine keeps running without you.
So what does “overvalued” mean?
It means the aggregate price of 500 companies is higher than historical averages suggest it should be — based on metrics that were developed for a completely different market structure, in a completely different interest rate environment, using backward-looking data that tells you nothing about timing.
Does it matter?
For market timers and macro pundits, maybe.
For individual investors focused on finding quality companies at attractive prices? Not really.
“Overvalued” is a description, not a strategy.
Your job isn’t to predict when the market will correct. Your job is to find investments that can generate your required return — and to have a process for buying and selling them systematically.
The valuation debate is a distraction. It’s noise designed to keep you anxious and paralyzed.
Tune it out and focus on what you can actually control. That’s what builds wealth.
Cheers,
Andrew
What's the biggest investing distraction you've learned to tune out? Leave a comment and let me know!
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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.