Should investors worry the stock market is overvalued?

One man in center of the photo on the floor of the New York Stock Exchange covers one hand over his mouth (his other hand is holding a tablet) while another man in the foreground looks up in the same direction with a worried look on his face. (Credit: Spencer Platt—Getty Images)

A single metric never tells the whole story of where the market is going. That said, one famous variant of the price-to-earnings ratio—a classic way to assess stock values—indicates the stock market is historically expensive. The variant is known as the "cyclically adjusted price-to-earnings ratio," or CAPE, and it shows the S&P 500 is currently pricier than before the Great Recession, as well as “Black Tuesday” in 1929, fueling speculation that another bubble is soon liable to burst.  

The P/E ratio, perhaps the most basic and widely used relative metric in finance, can help investors determine whether a company’s stock is overvalued relative to competitors, the broader market or its own historical returns. The same calculation can be done for a benchmark index like the S&P, but there’s a problem.