Alternative Way to Look at US Stock PE ratio.

Using current earnings the PE ratio on US Stock indexes is higher than 2007 peak but lower than 2000 bubble peak.

Adjusted PE

John Hussman is a great resource for alternative valuation metrics. While fundamentals are not a short term indicator and markets can continue to rally long after hitting elevated PE ratios, the facts do suggest increasing danger in these markets. Investors would be wise to listen to history and figure out a way to play musical chairs while hedging the risks.

As you can see below, using John Hussman's normalized profit margins to calculate an adjusted PE Ratio, US equity markets are trading at the richest valuations in history. There is a long fall to the average historical PE Ratio of less than 15 times earnings.

Some fund managers are taking heed of these facts by under weighting equities in their portfolios. This is an easy way to continue to participate in additional equity market rallies while taking less risk should a bear market appear. Also you will have other assets such as bonds or cash which could be reallocated to equities once the fundamental price is more reasonable.

Another easy approach is to use trailing stop losses of say 25%. This will take the emotion out of your sell decision while still protecting most of your principal.

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Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.

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