Majority of Investors Believe Stocks Are Currently Overvalued

In this week’s Sentiment Survey special question, we asked AAII members for their opinion of the current valuation of stocks. An overwhelming majority of respondents state that current market valuations are inflated to some degree. Specifically, 51% of respondents say that they believe stocks are at least slightly overvalued and 20% of respondents believe that stocks are very overvalued. A majority of both groups believe that current valuations reflect recent efforts by the Federal Reserve to boost liquidity, rather than actual company performance and/or earnings. This compares to 16% of respondents who say that current stock prices make sense given that a number of states and countries have begun to reopen. Additionally, 13% of respondents state that they believe the market is undervaluing stocks. Rationale includes that many companies have been able to mitigate headwinds in the current economic environment and that the market has not taken these efforts into account.

Here is a sampling of the responses: 

• “I don’t believe current prices reflect the future of the market. Stock prices are being supported by actions of the Fed instead of realistic estimates of economic activity.”
• “Most are fairly priced or overpriced. However, there are some stocks like Altria Group Inc. (MO) that have price-earnings ratios of 15, which are below the S&P 500 index’s price-earnings ratio of 20 and look cheaply priced.”
• “Stocks are considerably overvalued because earnings estimates have not been revised downward enough to reflect the severity of the current recession. Unemployment is incredibly high and will be slower to recover than expected. In addition, there are going to be many more business failures and loan defaults. I expect the S&P 500 to fall to at least 1,800, and possibly to 1,300 in the next year.”
• “I feel mid-cap and large-cap stocks are at a plateau at this time, while small-cap value has plenty of room to run up with. There are many uncertainties regarding what is happening at this time for almost all levels.”

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