{"id":576,"date":"2021-08-09T12:02:00","date_gmt":"2021-08-09T12:02:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/why-do-people-say-stocks-are-overvalued-right-now\/"},"modified":"2025-09-05T16:58:49","modified_gmt":"2025-09-05T16:58:49","slug":"why-do-people-say-stocks-are-overvalued-right-now","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/why-do-people-say-stocks-are-overvalued-right-now\/","title":{"rendered":"Why Do People Say Stocks are \u201cOvervalued\u201d Right Now?"},"content":{"rendered":"

\"\"\/<\/p>\n

\n

The more I learn about investing, the more I realize I don\u2019t know shit. <\/p>\n

Seriously \u2013 I mean that. <\/p>\n

There\u2019s always more to learn, so it\u2019s good to continuously be humbled by your own ignorance. That\u2019s why I do my best to listen to new podcasts, read new blogs, and waste money on books I could rent from the library as much as my schedule permits so I can be exposed to all the various topics and concerns of the hoi polloi \u2013 and make sense of them for you. <\/p>\n

One of the things that\u2019s been consistently<\/em> present in a lot of this content recently is the idea that stocks are \u201covervalued.\u201d <\/p>\n

While it\u2019s difficult to conceptualize what that even means for something so abstract, you could make a worthwhile comparison to the housing market to get the gist \u2013 a lot of people say houses are \u201covervalued\u201d right now, too. In other words, they cost more than they\u2019re worth, so if you buy one now, you\u2019re overpaying.<\/p>\n

That\u2019s kinda challenging when it comes to investing, no? How are you supposed to know? Should you keep investing anyway?<\/p>\n

Why do people say that stocks are \u201covervalued\u201d or \u201cexpensive\u201d?<\/h2>\n

It\u2019s easy to look at two things that you understand and say if one of them is more expensive than the other. But why would someone say a stock is expensive or overvalued? <\/p>\n

Let\u2019s pretend that Money with Katie is a public company (woohoo! IPO!) and that there are two shares \u2013 meaning ownership of Money with Katie is chopped in two. Now let\u2019s pretend you buy one of the shares for $50, so we\u2019re co-owners. Nice to meet you, partner. You got a bargain.<\/p>\n

Now let\u2019s pretend that Money with Katie makes $10,000 per year. <\/p>\n

If there are two<\/strong> shares of Money with Katie \u2013 yours and mine \u2013 that means we\u2019re the only two shareholders who split the revenue. <\/p>\n

To figure out the earnings per share, we\u2019d divide our earnings \u2013 $10,000 \u2013 by our number of shares, 2. <\/p>\n

That\u2019s an earnings per share of $5,000. <\/p>\n

You paid $50 your share of Money with Katie. <\/p>\n

So to figure out whether or not that price was expensive or not, we\u2019d take the price of the share ($50) divided by the earnings for that share ($5,000) to get 0.01. That would suggest the stock is way undervalued, since you can own half of Money with Katie for only $50, but earnings on that share are $5,000. <\/p>\n

But what if I charged you $10,000 per share? Money with Katie makes $10,000 per year, but in order for you to own half of it (or get $5,000 per share, per year), I want $10,000. You\u2019ll get $5,000 in earnings on your $10,000 share each year, theoretically.<\/p>\n

Now, the price per share ($10,000) divided by the earnings per share ($5,000) is 2. The share price is twice as much as your earnings for that share.<\/p>\n

But hey, you break even after two years! And after that? It\u2019s all gravy, baby. A great value indeed, if you think Money with Katie is going to the moon.<\/p>\n

A lot of companies are \u201covervalued\u201d by this measure, because theoretically, you\u2019re betting on the future<\/em> of that company. If you could own half of Money with Katie for $10,000, that may be a wonky ass deal after the first year of earnings since you know that it only made $10,000 total. But what if it was projected to make $100,000 next year? Now, your $10,000 investment to own half doesn\u2019t sound so bad.<\/p>\n

This example is funny because we\u2019re pretending there are only two shares, so the numbers probably feel a little extreme. Apple, for example, has about 16 billion<\/em> shares outstanding.<\/p>\n

What does shares outstanding mean?<\/h3>\n

\u201cShares outstanding\u201d basically just means how many little pieces are out there floating around owned by people. There are 16 billion shares of Apple available, and they\u2019re each worth about $125. That means the total \u201cvalue,\u201d also known as \u201cmarket capitalization,\u201d of Apple is $2 trillion.<\/p>\n

(16 billion shares * $125 each = about $2T<\/a>, as of May 23, 2021.)<\/p>\n

So Apple is technically \u201cworth\u201d $2T. In 2020, Apple reported a net income (profit) of $57B. <\/p>\n

Each share costs $125, and there are 16 billion of them. <\/p>\n

That means the earnings per share<\/em> in 2020 was $3.50. Divide the stock\u2019s price ($125) by the earnings per share ($3.50) \u2013 Apple is trading for 35x its earnings per share. Put another way, you pay $125 per share to get $3.50 in earnings. <\/p>\n

But it begs the question: Do you think Apple will continue to grow aggressively? Or, do you think it\u2019s overpriced? <\/p>\n

If you\u2019re like, \u201cShit, I don\u2019t know,\u201d that\u2019s the point. It\u2019s hard to know. Nobody knows whether Apple will make $100B in profit next year or earn less. There are simply too many factors that impact both its performance as well as the price of its stock. <\/p>\n

This is far from the only metric you can look at to determine how the stock market, as a whole, is doing<\/h2>\n

The upshot is that you can look at different indices as a whole (like the S&P 500) and determine collectively if it\u2019s \u201cundervalued\u201d or \u201covervalued\u201d as defined by this ratio, and some people point to periods before previous downturns where it was overvalued as a sign that an overvalued market means a downturn is coming. <\/p>\n

Maybe, maybe not. <\/p>\n

But now you know!<\/p>\n

My head hurts.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

The more I learn about investing, the more I realize I don\u2019t know shit. Seriously \u2013 I mean that. There\u2019s always more to learn, so it\u2019s good to continuously be humbled by your own ignorance. That\u2019s why I do my best to listen to new podcasts, read new blogs, and waste money on books I could […]<\/p>\n","protected":false},"author":178814,"featured_media":2432,"comment_status":"closed","ping_status":"open","sticky":false,"template":"si-template-single-post-taxable-investing.php","format":"standard","meta":{"footnotes":""},"categories":[35],"tags":[44],"class_list":["post-576","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-and-taxes","tag-taxable-investing"],"yoast_head":"\nWhy Do People Say Stocks are \u201cOvervalued\u201d Right Now? - Money with Katie<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/moneywithkatie.com\/why-do-people-say-stocks-are-overvalued-right-now\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why Do People Say Stocks are \u201cOvervalued\u201d Right Now? - Money with Katie\" \/>\n<meta property=\"og:description\" content=\"The more I learn about investing, the more I realize I don\u2019t know shit. 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