US stocks tumble from an expensive starting point

Kieran Davies | Coolabah Capital

A sharp correction is under way in US stock prices, where equities are down about 10% over the past month.

The correction is happening against the backdrop of measures of long-term valuations – which unfortunately never provide any short-term signals on timing – that suggest US equities are extremely expensive relative to both earnings and government bonds.

For example, the Shiller price-earnings ratio, which compares real stock prices with average real earnings over the past ten years, recently plateaued at about 37 from late 2024 to early 2025, broadly matching the peak reached in 2021 and only surpassed by the all-time high of 44 reached in the dot-com bubble of 1999-00.

At the same time, CCI calculates that stocks are yielding little in the way of a premium over risk-free assets, with the median Fed measure of the equity prick premium, which compares the forward earnings yield on stocks with different measures of real government bond yields, falling to 2.6% in February, down from the long-term average premium of 4.7% and only beaten by the the absence of any premium at the height of the dot-com boom.

Investors are clearly unsettled by the Trump administration’s tariff policies given the size and breadth of the planned tariffs greatly exceed what Wall Street had anticipated, with the haphazard scheduling of different tariffs underpinning a surge in estimated uncertainty about economic policy to the highest point outside of COVID (trade policy has led this move, but there is also a surge in uncertainty about nearly every aspect of government policy).

For its part, the administration needs tariff revenue to partly pay for expensive tax cuts and it is hoping that people look past the economic damage caused by tariffs and extreme policy uncertainty to that eventual fiscal stimulus. 

The government is probably also hoping that the Federal Reserve will act as a partial cushion against economic weakness by resuming cutting interest rates over coming months.

However, there is a clear possibility that the Fed’s hands end up tied by higher inflation, where manufacturing surveys are already pointing to sharp pressure from rising goods prices and some consumer surveys are registering a sharp pick-up in both near- and medium-term inflation expectations.  

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All prices and analysis at 14 March 2025.  This document was originally published on Livewire Markets website on 14 March 2025. This information has been prepared by Coolabah Capital Ltd ACN 153 555 867 Australian Financial Services Licence No. 482238. The content is distributed by WealthHub Securities Limited (WSL) (ABN 83 089 718 249)(AFSL No. 230704). WSL is a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited (ABN 12 004 044 937)(AFSL No. 230686) (NAB). NAB doesn’t guarantee its subsidiaries’ obligations or performance, or the products or services its subsidiaries offer.  This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice.  Past performance is not a reliable indicator of future performance.  Any comments, suggestions or views presented do not reflect the views of WSL and/or NAB.  Subject to any terms implied by law and which cannot be excluded, neither WSL nor NAB shall be liable for any errors, omissions, defects or misrepresentations in the information or general advice including any third party sourced data (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the general advice or information. If any law prohibits the exclusion of such liability, WSL and NAB limit its liability to the re-supply of the information, provided that such limitation is permitted by law and is fair and reasonable. For more information, please click here.