On My Radar - Valuations and Forward Returns (Part II)

Written By Steve Blumenthal

July 11, 2025
By Steve Blumenthal

“Market conditions can’t be separated that cleanly. This is, because that is. This is not, because that is not. If you look deeply into a speculative bubble, you can see the market collapse in it. If you look deeply into a market collapse, you can see the bull market in it. Each is a continuation of the other.”

— John Hussman, Ph.D.
President, Hussman Investment Trust

Grab that coffee and find your favorite chair. It’s been months since we last reviewed valuation levels- let’s take a look. You’ll find today’s post to be a quick read.

As you view the charts, keep in mind that Big Beautiful is going to inject another $5 trillion into the system and money market balances are surprisingly high. Inflation remains the probable outcome with wave number two coming soon. Asset price inflation is also a potential outcome until the bond vigilantes say “no más.”

Geek goggles on, let’s go.

On My Radar: 

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Mid-year Valuations Part II

Before we jump in, it is important to note that while the stock market is “Extremely Overvalued,” that doesn’t mean that all stocks are overvalued. For example, biotech has been out of favor for some time (not a recommendation, just an observation). There are opportunities, but I don’t see them in the popular S&P 500 Index and cap-weighted index structures in general. As you all know by now, I'm not bearish; I’m just not interested in buying overvalued stocks.

But this leaves us a bit empty as to what to do. Viewing the valuation data, I believe, can help one set targets to know when the getting is good. There is a reason why Warren Buffett is holding so much cash. You’ll find his favorite valuation metric below, along with several of mine.

Last week, I shared several metrics in Mid-Year Valuations Part I. One of my favorites is the Price-to-Sales ratio, which remains extremely overvalued. Today, let’s look at a few more and also see what they tell us about coming 1-, 3-, 5-, 7-, 9-, 10-, 11-, and even 12 years (the twelve-year chart is courtesy of John Hussman).

A Quick Look at Everything

“Extremely Overvalued,” pretty much across the board.

Ned Davis Research: See important disclosures below

Median Fair Value is 31.2% below the June S&P 500 Index Close

  • Note the red and green arrows.

  • Median Fair Value is at 4,269 (that’s a good target to keep in mind).

  • “We’d be better off here,” points to the 61.3-year median PE of 17.9.

  • Median PE as of 6-30-25 is 26.0.

Source: NDR, CMG arrows/comments

S&P 500 Index vs Stock Market Capitalization as a Percentage of GDI

  • The middle section (orange line) plots month-by-month market cap as a percentage of nominal (before inflation factored in) gross domestic income. The dotted line is an upsloping regression trend line.

  • The lower section (blue line) plots how far above or below the orange line is vs the trendline. When the blue line is above the upper dotted line, it is in the “Top Quintile” of all readings dating back to 1925. When below the bottom dotted line, it is in the “Bottom Quintile” of all readings since 1925.

  • NDR then plots the “Averge % Change in the S&P 500” that occurred 1-, 3-,5-, 7-, 9-, and 11 years later when your starting point was in the “Top Quintile” and when your starting point was in the “Bottom Quintile.”

  • Bottom line: We are in the “Top Quintile” with the current extreme nearing the high in 2021 but below the tech bubble levels in the early 2,000.

Source: NDR, CMG

Household Equity Percentage vs. Subsequent 10-year Rolling Returns

  • The yellow bar at the top shows where we are now vs other periods of high household equity ownership (most recent data 3-31-25).

  • The “We are here” arrow indicates an approximate -2.3% outcome in 10 years.

  • Note the correlation between the blue line and the orange line. Not perfect (nothing is), but it reflects a high 0.80 correlation coefficient since 1951.

  • The dotted orange line stops 10 years ago, since that is the last known 10-year result.

  • What patient investors are looking for is a correction from extreme household ownership of stocks (the current 63.8% equity percentage as a percentage of total household stocks, bonds, and cash) to somewhere below 50.

NDR, CMG annotations

The Bubble – Contains the Collapse – Contains the Resurgence

John Hussman’s June post is out. Worth the read. You can find it here.

Let’s focus on what John says is his “most reliable valuation measure, based on correlation with actual subsequent S&P 500 10-12 year total returns in historical data spanning a century of market cycles.

  • The blue line shows the market capitalization of U.S. non-financial equities as a ratio to their gross value-added, including our estimate of foreign revenues.

  • MarketCap/GVA presently remains beyond the 1929, 2000, and even 2022 extremes.

  • Indeed, the current level is less than 1% from the most extreme level in U.S. history, which was set in February of this year.”

  • The arrow in the upper right points to the current level, which is higher than 1929, 1966, 2000, and 2021.

Buffett Indicator: The Latest Data

With the Q1 GDP third estimate and the June close data, we now have an updated look at the popular "Buffett Indicator:" the ratio of corporate equities to GDP. The current reading is 197.6%, down slightly from the previous quarter and the lowest level since 2023. Thus, the indicator is signaling an overvalued market. Please note that this update follows GDP releases, which always lag. Source: Advisor Perspectives

Source: Advisor Perspectives

If you’d like to continue on this valuation journey, you can find some additional information here: Market Valuation: Is the Market Still Overvalued? by Jennifer Nash, 7/1/25

Money Market Funds

I mentioned the large balance in money market funds. Think of this as money (some of it) that may eventually find its way into the stock market. According to @Barchart, there is $1.7 trillion sitting in money market funds.

Additional source - Data from the Investment Company Institute (ICI):

  • As of July 2, 2025, total money market fund assets were reported at $7.08 trillion, with a weekly increase of $55.56 billion. Retail funds stood at $2.91 trillion, and institutional funds at $4.17 trillion, broken down by government, prime, and tax-exempt categories.

  • The ICI website provides weekly data tables under "Money Market Fund Assets" that could be used to create charts. These tables include historical data for the last 20 weeks, which can be visualized to show trends in total assets, retail vs. institutional, or by fund type (government, prime, tax-exempt).

See CMG Disclosures at the bottom of this page.

For more information about NDR, please visit at www.ndr.com.

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Economic Summary Total View

Following is a dashboard of sorts I follow.

Factored into each section is a summary of many inputs.

  • For example, for Economic Activity, NDR looks at Real Gross Domestic Product (GDP after inflation), Industrial Production, ISM Manufacturing, Corporate profits, to name a few.

  • For inflation, they factor in CPI, PCE, Producer price index for final demand, non-farm unit labor costs, and hourly earnings, to name a few.

The gauges are self-explanatory. Generally, green is improving, and red is worsening. The needle points to the current score for each category.

NDR, CMG summary

 

Trade Signals: Update - July 10, 2025

“Stay on top of the current market trends with Trade Signals.”

“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”

– Charlie Munger

Market Commentary:

I’ve added the following to the “Market Summary” section to begin tracking Treasury Secretary Scott Bessent’s 3-3-3 game plan—a framework aimed at improving the U.S. fiscal position:

  • 3% GDP Growth — Currently at 1.4% (highlighted in red), well below the 3% target.

  • 3% Budget Deficit-to-GDP Ratio — With GDP at $29 trillion, Bessent’s goal implies a deficit of no more than $870 billion. Today, the deficit exceeds $2 trillion. Put simply, the U.S. is spending around $7 trillion while bringing in just $5 trillion in tax revenue.

  • 3 Million Barrel-per-Day Increase in U.S. Oil Production — Starting from 13.2 million barrels per day (as of June 2025), the plan calls for boosting output by an additional 3 million barrels per day. We’re not there yet (also shown in red).

Additionally, I’ve added “Inflation” to the dashboard. Red means it is currently above the Fed and Bessent’s 2% target.

The big picture: If Bessent’s 3-3-3 targets are met, it could mark a meaningful step toward stabilizing America’s growing debt burden. We’ll keep tracking the progress.

Source: CMG, US Treasury, eia.gov

Notable Changes This Week:

  • The Weekly MACD for the S&P 500 Index remains bullish. The Monthly MACD turned bullish this week.

  • The Weekly MACD for the 10-year Treasury Yield is bullish, signaling lower interest rates.

  • The Weekly MACD for Gold is bearish.

About Trade Signals

Trade Signals is a paid subscription service that posts the daily, weekly, and monthly trends in the markets (and more). It is free for CMG clients.

TRADE SIGNALS SUBSCRIPTION ACKNOWLEDGEMENT / IMPORTANT DISCLOSURES 

The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. Not a recommendation to buy or sell any security.

Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. Current viewpoints are subject to change. Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. 

 

Personal Note: Longevity

"In the end, only three things matter: how much you loved, how gently you lived, and how gracefully you let go of the things not meant for you."
— Gautama Buddha

It’s been a fast pace, and I find it hard to believe we are in the middle of July. In a blink, here we are. I’m reminded of Ferris Bueller… “Life moves pretty fast. If you don't stop and look around once in a while, you could miss it.”

I listened to a pitch today on a promising immunotherapy drug that directly targets cancer cells without damaging the good cells. Hopeful.

Other areas are making significant advances in terms of longevity - living healthier, longer. My friend Dr. Mike Roizen believes that a combination of exercise, diet, and science can make a 90-year-old biologically equivalent to age 60. He guesses this to be an 80% probability within the next ten years. I sure hope he is right.

Another week down. As you head into the weekend, channel your inner Buddha, shower love on the people you love most, live gently, and let go of the things not meant for you.

With kind regards,

Steve

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Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
75 Valley Stream Parkway, Suite 201, Malvern, PA 19355
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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management. Author of Forbes Book: On My Radar, Navigating Stock Market Cycles.

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On My Radar - Big Beautiful Gold