I hate to say the words “stock market crash,” because people tend to lose their heads when they read that, but there’s really no way around it. The fact is that the US stock market, especially the S&P 500 stocks are overbought and overvalued. You only need to look at how the current S&P index compares to the S&P 500 index of 2009. In March 2009, the index hit its six-year low. This was right after the great financial crash of 2008, and this was the bottom of the market. If you have bought into the S&P 500 index at that time, you would have made 254% on your investment. That being said, the current price/earnings ratio is quite worrisome. The average PE is 17.6% based on consensus earnings for the rest of this year. This may seem manageable, but when you look at the last time the S&P 500 had this PE ratio, was in early 2010. That was around the time when investors were running away from the market. They were not eager to scoop up stocks and start investing again.
It’s really scary, because this is not the only warning that you should pay attention to. This is not the only indicator that the US stock market may crash. Other indicators show that the sales and earnings growth are not very encouraging. It shows an earnings per share change of -3.7% in the most recent quarter. While there’s been a lot of optimism due to spectacular corporate performances like Apple’s, the sad news is that most stocks are not Apple (NASDAQ:AAPL). The reality is that the US economy is not as strong as people assume it to be. The rest of the world’s economies aren’t doing much better, either. Put all these factors together along with the strong dollar and the lingering uncertainty regarding the impact of the depression in oil prices and there is tremendous downward pressure on the US stock market. This shouldn’t be a surprise; after all, it’s been setting record after record recently. As the saying goes, what goes up must come down.