How to tell when the stock market is overvalued I Is the share market overvalued right now - YouTube

Hi, right now the markets are trading at all-time highs and everyone has one question, that are markets overvalued?

Should we sell some of our stocks? But before this, you should know one thing

That how to access that the markets are overvalued? Today we will tell you about some indicators

which will help you understand that the markets are overvalued or not

The first metric is the PE ratio and can be calculated very easily

You have to divide the share price of the company to its earning per share and you get the PE ratio

And as you calculate the PE ratio of a company you can do the same with Nifty or Sensex

According to analysts, the more the PE ratio of the market, the more they are overvalued

If you observe the past 15 years data, the PE ratio of Nifty went a lot down during the 2008 crisis

It was even 10 at one point. Currently, Nifty's PE is at 29 and was 42 at one point in the recent past

But due to the good earnings of companies, it has slipped a bit down

It was never 42 in the past 20 years.

The second important metric is the Dividend Yield and is calculated by dividing the dividend per share to the current market price

High dividend yield points out an undervalued market and low dividend yield towards an overvalued market

In the past 20 years, it was at 3.18% in 2008 which was the highest ever

In the March 2020 Covid crash in the markets, the dividend yield was 2%, and currently, it is at 1.07%

and has gone to 0.82% in the past 20 years

The third important metric is Market cap to GDP, when you add all market caps of the listed companies and divide it by the GDP

then you get this metric and is also known as the Warren Buffett indicator

According to Warren Buffett, when the total market cap is more than the GDP, then the markets are overvalued

This indicator was at 150% in the 2008 crash, 56% in the March 2020 crash, and currently is at 115%

The fourth and the last metric is the BEER ratio and is calculated by dividing the bond yield to earnings yield of the market

Earnings yield is calculated by dividing the EPS to the market price of the share

This tells you the earnings you get in return for investing Rs.100 in a stock of a company

The government bond yield also tell the same, that how much interest you get in return for Rs.100 investment

By comparing the bond yield by the earnings yield of the market we can access if it is under or overvalued

because the risk in the govt bond is less as compared to the stock market

When the govt bond yield is less than the earnings yield of the market, then the market is undervalued

And if govt bond yield is more than the earnings yield of the market, then it is overvalued

Right now the govt bond yield is 6.025% and the earnings yield is at 3.45%

So these were the indicators that tell you whether the market is undervalued or overvalued

We are not recommending following an indicator blindly, but an investor should know about them

Subscribe to the Groww channel to know more updates like these. Bye.