When is the stock market worth looking at from an investment standpoint
When the Shiller P/E ratio is at its historical average levels, you can be almost certain the stock market is a very good investment for an intermediate period of 10-15 years.
You can see the Shiller P/E ratio here: https://www.multpl.com/shiller-pe
Today (4.8.2023) it's 30.89. This means that E/P ratio is 3.24%. Note that this is the earnings that companies are free to use to pay dividends. However, a company that pays all of its earning as dividends and doesn't invest into growth can't be expected to grow more than about 2% per year (inflation level target). So today you would expect 5.24% yield if you invest into S&P 500 index.
Also you should consider reversion to the mean. There's a law that securities tend to revert to their mean historical pricing levels. So if Shiller P/E ratio reverts to 17.05, this means a multiplication by 17.05/30.89 = 0.552 or 44.8% decrease.
So for example for a 15-year investment, if the reversion to the mean happens in the end, you get 1.0524^15 * 0.552 = 1.1875x the money back you invested. This is 1.0115^15 so there's a very major possibility if you today invest into S&P 500 for a 15-year period, that you would get only 1.15% annually, less than inflation.
However, the outlook may not be as dim as you would expect based on S&P 500 and Shiller P/E ratio alone.
Firstly, today companies are often paying investors in stock repurchases instead of dividends. This means an individual stock has higher earnings growth than they used to in history. The Shiller P/E ratio uses only inflation adjustment, not stock repurchase adjustment. Secondly, mergers and acquisitions are today very common and companies have to depreciate "goodwill" from their balance sheet immediately if they see its value has diminished. Thus, you will see lots of goodwill depreciation, which tends to reduce earnings. But you never see goodwill appreciation, if some acquisition turned out to be a very good idea, meaning it had more value than what was paid, you don't see a one-time positive earnings from that.
Thirdly, why the S&P 500 is at such expensive level today can be seen by just looking at its major components:
- Apple: horribly overvalued
- Microsoft: horribly overvalued
- Amazon: horribly overvalued
- Nvidia: horribly overvalued
- Alphabet/Google A: horribly overvalued
- Tesla: horribly overvalued
- Meta/Facebook: horribly overvalued
- Alphabet/Google C: horribly overvalued
- Berkshire Hathaway: finally, we have a sensible investment in the list!
- Unitedhealth: I don't know anything about this
So at least 8 out of the 10 largest holdings are massively overvalued, to the point you shouldn't invest into them.
We are in the middle of the second tech bubble. The first tech bubble was driven by vague promises of future earnings, and investors lost a lot of money into worthless companies. The second tech bubble is more massive: it's not in the form of worthless companies having valuation, but it's in the form of companies doing great business but that just happen to be valued at 2-10 times what a reasonable investor would pay for them.
If you avoid those overvalued companies, you may very well decrease the Shiller P/E ratio of your stock portfolio, meaning increased E/P ratio and increased yield. And if the second tech bubble ever ends, you won't lose your money into that.
I believe it's entirely reasonable to build a portfolio today with Shiller P/E ratio of 18-20, meaning 5 - 5.5% yield plus inflation or 7 - 7.5% yield. Lower than historical returns, but still pretty darn good. Beats bonds quite well.
Also, if you don't limit your investments to US stock market only, you will see that the investment opportunities that have sensible valuation will be massive. US stock market is generally overvalued today, but the global stock market certainly isn't.