Is the stock market dreadfully overvalued?

 

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• Now a days, lot of analytical reports and news are flowing into the market about the stock market valuation. The reason why, after Covid 19 lock down, the stock market bottomed out from lower level. The Indian stock market has never seen like this stock price. Within a year, the stock market benchmark Nifty has doubled as well as majority of the stock has reached all time high. Now, the question that, is this rally will pursue or possible to correction.
• Before, we have to measure the markets through some reliable valuation methods. After, you will able to understand current market condition. Almost a century, we used to P/E ratio for valuation the overall benchmark index and individual stocks. Though, today’s modern analysis are not considered that, P/E ratio is not a solo indicator to measure the stock market valuation.
• Basically, P/E ratio is calculated by earnings in other word, earnings multiple of the stock price or benchmark index. For example, A company is earning (Eps) Rs.10/ which stock price is 100 RS that means its earning multiple is 10 (pE ratio). Stock price / EPS = P/E ratio. This simple calculation will show that, whether a specific stock is overvalued or underpriced. Below I give an illustration to understand simply. By through, how P/E ratio consider when you decided to invest in the stock market.
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• The lower PE ratio means that, the stock market is undervalued. Generally, PE ratio basis analysis intimidate the historical average PE ratio. When market goes below the historical average really that is a Good time to invest in the stock market. The higher PE ration means that stock market expectation has been soared. Above the PE rato data chart and stock market return will give the clear picture.
• The Shlller PE ratio
• It is also one of the PE ratio basis valuation indicator. It so called as inventor’s name. which called in another name is, CAPE = cyclically adjusted price to earning ratio. The stock price is divide by its 10 years average earning adjusted in inflation. In terms of the Nifty, now Shiller PE ratio shows at 31. Absolutely, which number is too high. But, we will see some other indicators. Then come to conclusion.  If this ratio show us below 18 level, the investors will be much higher than normal return. This indicator would indicate the market valuation and we may know that, market is going to crash sooner or later. Last three stock market crashes had been identified through this indicator.
• The current shiller PE ratio indicate, the stock market is in overvalue. This ratio moved beyond above the historical average.
• Buffet indicators.
• The stock market legend warren Buffet pointed out this indicator who wrote letter to his investors at 1999. The total stock market capital and nation’s GDP value will be calculated, by this calculation we can identify if the stock market is being overpriced or underpriced.
• Buffet Indicator = stock market capitalization / GDP
• In the recent report said that, Indian stock market capitalization has reached 90 percent in GDP value.  Generally, Indian market average market cap / GDP ratio could below 75 percent. Likewise, US market story is more terrible than Indian market valuation which ratio indicates 200 percent of US market cap. The stock market analysts are warning that, US market entered into danger zone.
• In 2020, market cap GDP ratio at 56 percent, which ratio has increased at 104 percent in 2021. Its historical average rate is 79 percent. As of this ratio basis current market valuation much higher.
• Corporate earnings and GDP ratio
• the stock market investors and institutions are regularly tracking the corporate results. When corporates constantly provide better results, the better results will improve equity return on the other hand, corporates if declare the poor results equity returns will decline, as soon as market would reflect negatively. Subsequent, incremental of corporate results would make positive sentiment in the market follow through stock prices will surge. By this reason, growing of the corporate profits will contribute key role in a bull market.
• The GDP growth rates and corporates profits both are corelated with each other. So that, accelerated of GDP growth is made positive sentiments amongst the investors. 
• corporate revenues and corporate profits are scrutiny by market analysts. Corporate earning is a strong indicator whether market is going to meet upward or downside risk.
• In the 2008 financial crisis corporate profits GDP ratio decline at 1.6% then corporate profit has turned at 3.2% in 2011. Higher the corporate profits mean to the stock market is in fair value, the stock holders will get higher return in future. Lowering the corporate profits leads to massive market correction or establish the bear market.
• Today, Nifty was closed at 16,258 , probably nifty move up to 16,600. The stock market participants may get cheer by non-stopping rally. But all indicators shows that, the stock market is overvaluation. Particularly, Nifty earnings forecast establish excitement amongst the investors. Even though, most of the stock crashes and recessions would exhibit earlier sign but few experienced persons can only observe that dangerous. The main reason is that, 40 percent earning growth in coming financial year. Market must be met this projection. Unless, market will punish vulnerably.
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