Stock market talk has been filled with references to “bubbles” over the past couple years. But Wharton Professor and author Jeremy Siegel says those seeing a bubble in the current market need to get their eyes checked.
“The term bubble should be reserved for assets trading for at least twice their true value, based on such fundamental factors as earnings, dividends and interest rates,” Siegel writes in Kiplinger’s Personal Finance. “For example, the U.S. stock market was just entering a bubble early in 2000, when Standard & Poor’s 500-stock index reached 31 times earnings, nearly twice its historical average. Tech stocks, many of which sported price-earnings ratios in the triple digits, were already in bubble territory.”
Using that standard, today’s stock market is far from bubble territory, Siegel says. S&P 500 stocks are trading for about 18 times estimated 2015 earnings, about 10% higher than the market’s median P/E of 16 since 1954, he notes.
Siegel talks about the impact oil prices and the strong dollar have had on earnings, and why he thinks estimates for 12% earnings growth in 2016 look legitimate. “Don’t let fearmongers deter you from buying stocks. The stock market is not in a bubble,” he says. “Earnings and today’s extraordinarily low interest rates fully justify current trading levels.”