MarkHulbert

CHAPEL HILL, N.C. (MarketWatch) — Are stocks overvalued right now, relative to earnings?

That’s an important question to ask anytime, but especially now as we kick off earnings season. Unfortunately — probably because many don’t like the answer — too few are asking it.

No matter how you slice it, however, stocks are either moderately or significantly overvalued currently, relative to historical norms.

Based on trailing 12-month earnings, the S&P 500’s SPX, -0.61%  current P/E ratio is 18.8. Even if we assume that all 500 companies in the index will report earnings over the next few weeks that match analyst estimates, the S&P’s P/E drops only modestly, to 17.9.

Even that lower level is higher than 77% of comparable readings over the last 140 years, according to data compiled by Yale University finance professor Robert Shiller. The average P/E for the S&P 500 since 1871 is 15.5 and the median P/E is 14.5.

By the way, don’t try to wriggle out from underneath this sobering comparison by focusing on what analysts expect S&P 500 companies to earn over the next 12 months. Since analysts are almost always bullish, P/Es based on forward earnings are almost always lower than ones based on trailing earnings. Comparing a forward-based P/E to historical P/Es based on trailing earnings is little more than a sleight of hand.

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How much does this sleight of hand skew your conclusion? Quite a bit, though it’s hard to know for sure since we don’t know what Wall Street analysts’ earnings estimates were in 1871. But a study conducted several years ago by Cliff Asness, co-founder of AQR Capital Management, and Anne Casscells, a managing director of Aetos Capital, estimated that, historically, the median forward-looking P/E has been around 11.

Since the current forward-looking P/E for the S&P 500 is around 15, according to S&P estimates, a true apples-to-apples comparison continues to show the current stock market to be significantly overvalued.

What about the famous cyclically-adjusted price-earnings (CAPE) ratio made famous 15 years ago by Shiller and Harvard economist John Campbell? This is the ratio, you might recall, in which the denominator is average inflation-adjusted earnings over the trailing 10 years. The CAPE has a far better forecasting record than the traditional P/E.

The CAPE currently stands at 23.6, according to Shiller. That is higher than 90% of comparable readings since the 1870s.

The good news here, if there is any, is that valuations exert only a weak gravitational pull over the stock market’s near-term direction. So there is no reason that the bull market couldn’t continue for a lot longer.

But the stock market’s long-term prospects certainly appear bleak: According to an analysis Asness recently conducted. the current CAPE level of 23.6 translates into a forecast that the S&P will produce a 10-year real return — between now and mid 2023, in other words — of just 0.9%.