MW 9 of the stock market's 10 most-watched valuation indicators are now in 'sell' territory

By Mark Hulbert

Indicators are at extremes - stretched valuations are bearish for stocks

When using valuation indicators to allocate your stock portfolio, pay attention to the extremes. The high and low points of a valuation ratio tell you more about the stock market's true value or likely future returns than indicators that are closer to the middle of the range.

That's according to a new study that earlier this month began circulating in academic circles. Entitled "Multiples for Valuation: Go High, Go Low, Ignore the Middle," the study was conducted by Javier Estrada, a professor of finance at the IBES Business School in Barcelona, Spain.

Estrada analyzed the predictive records of three widely followed valuation ratios: The price/earnings ratio; the cyclically-adjusted P/E ratio (or CAPE), and the dividend yield. He found that ratios in the middle of their historical distribution conveyed little information of value to a market timer; only extremely high or extremely low readings were worth following. "[Valuation] multiples are more useful to forecast stock returns when they are relatively high or low than when they lie somewhere in the middle," he wrote.

I found similar results when I extended Estrada's research to the seven additional valuation indicators I regularly follow in this column (see the table below). These seven and Estrada's three were chosen for this regularly-updated table because each has a statistically significant correlation with the S&P 500's SPX subsequent 10-year inflation-adjusted total return.

Estrada's research will greatly simplify market timers' decision-making. Imagine paying attention to a valuation indicator only when it is in the top or bottom decile of its historical distribution. This was one of the ways Estrada illustrated the value of his research. If you put that into practice, you could safely ignore that indicator 80% of the time.

On the other hand, nine of the 10 valuation indicators I monitor monthly are in the top decile (most bearish) of their distributions. Only one is not: the price/earnings ratio based on trailing 12-month-as-reported earnings $(LTM)$. But Estrada's research suggests that an indicator between the 10th and 90th percentile of its distribution tells us little one way or the other about the stock market's expected returns over the next few years.

Each of the other nine indicators featured in the table are at or close to higher levels than ever - meaning nine of the 10 are in "sell" territory while one is neutral.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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-Mark Hulbert

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February 24, 2026 07:55 ET (12:55 GMT)

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