It can be hard to see a bubble when you’re in the middle of it. This well describes our situation today.
Let’s look at a few large tech stocks’ price-to-earnings (P/E) ratios.
- Amazon: 115
- Tesla: 918
- Zoom: 522
These valuations are worrying. Yes, these companies have historically shown high growth. But at these kinds of levels, valuations are starting to get ridiculous.
P/E is a commonly used indicator of how expensive a stock is. You can think of P/E as a multiple of how expensive a company is compared to its earnings. The lower it is, the cheaper a stock generally is. And a higher P/E means it’s more expensive. There are other factors to consider, such as debt, debt load, growth rate and assets. But P/E is generally a good place to start to figure out how expensive a stock or index is.
Overall, the Nasdaq 100 currently trades at an average P/E ratio of 35.9 according to WSJ data. A year ago it was around 25. Back in 2000 it peaked at a P/E ratio of more than 100, so we’re still far from that level. However, I wouldn’t exactly call current U.S. stock valuations attractive.
With today’s record levels of corporate debt and a questionable economic outlook, the outlook for stocks gets even cloudier.