The median PE multiple on the New York Stock Exchange (NYSE) is at its highest level since 1945, showing broad-based high stock valuations that aren’t as evident when you only look the S&P 500. In fact, median prices are at or near record highs by virtually any measure, which could be just as dangerous to investors as some of the more obvious bubbles in recent years.

“Is the current widespread valuation extreme more dangerous than a concentrated extreme simply because concentrated extremes tend to be more obvious and eye-catching?” asks Wells Capital Management chief investment strategist James Paulsen. “A concentrated valuation extreme tends to loudly announce itself whereas a broad-based valuation extreme seems more stealth and, therefore, perhaps more dangerous.”

sp 500 pe postwar 0115 Median NYSE PE

median pe nyse 0115

Median NYSE PE: Median stock prices high whether you measure by earnings, book value, or cash flow

If you compare trailing twelve month PE multiples for the S&P 500 and the NYSE median, you get two very different pictures. Take the late 90s as an example. The tech sector was booming, and while it’s easy to spot the signs of a bubble in retrospect many people were aware that valuations had disconnected from reality. But when the S&P 500 PE was at 30x in late 2000, the median was less than 15x. The median PE in 1998 was also fairly high, but still well below the S&P 500. So many investors were chasing enormous returns from a few hot stocks that the sky high valuations were at least somewhat cordoned off. Whether you look at price-to-book or price-to-cashflow you get essentially the same picture.

median pb nyse 0115

median p cashflow nyse 0115

But it’s not just the median PE multiple that’s high, if you take any slice of the NYSE and compare it to history it’s either at an all-time high or nearly so, a sea change since 2012 when most 5% sections were in the top 30% of historical valuations but not quite in the top quartile.

nyse pe percentile v history 0115

Dealing with an expensive market

Paulsen isn’t suggesting an imminent bear market, not even necessarily a correction, but he does think it’s important for investors to understand just how vulnerable they are if they are heavily invested in US stocks right now. He thinks indexing is a good idea right now because, ironically, the S&P 500 is cheaper relative to the history than a lot of the market, and says that diversifying away from US equities altogether is probably a good idea.

See the full study here.