Bulls aren't going to like this new stock-market valuation model

By Mark Hulbert

Stocks are expensive regardless of whether you take a top-down or bottom-up approach

I recently was introduced to a unique stock-market valuation model whose approach is unlike any of the others whose status I regularly report in this monthly column. Unfortunately for the bulls, its message is as bearish as those of those other models.

The new model takes a bottom-up approach to valuing the market. It first computes each stock's fair value, and then calculates where the overall market would be trading if each individual stock were trading at that level. This way of calculating the overall market's fair value will be attractive to those of you who object to top-down approaches, such as the Buffett Indicator.

The new model to which I refer, known as "Price Wizard," is calculated by Parallax Financial Research. The model was produced by a form of artificial intelligence known as a neural network, trained to recognize patterns in the relationship between a stock's price and its underlying fundamentals. Kris Kaufman, Parallax's president, says that the data on which the model was trained contains "no future growth expectations, analyst estimates or price momentum." The sole inputs are "earnings, sales, net income, dividends, cash flow, industry group, book value, debt, margins, inflation rate and interest rate."

Furthermore, only pre-2000 data was used to train the model's neural network. So its performance since then represents a real-time test of its effectiveness. Though I have not independently calculated the model's performance, Kaufman reports that a portfolio containing the 10% of stocks that the model deems to be most undervalued "significantly outperforms the common market indices." Parallax's models have been available on Bloomberg terminals since 2012.

The accompanying chart plots the ratio of the stock market's current level to what this Price Wizard model calculates as its fair value. (The calculation is made for the 1,000 largest-cap U.S. stocks, which constitute nearly 95% of the stock market's total market cap.) The most recent ratio, at 1.46 to 1, is the highest it's been since the top of the internet bubble. This is worrisome enough, but Kaufman reports that others among his models are also indicating that a market top is imminent.

Status of other valuation indicators

The table below, which is updated monthly in this space, lists 10 of the top-down valuation indicators that I have been able to verify as having superior track records when predicting the stock market's subsequent 10-year real total return. A 100% reading in the table means the stock market is more overvalued than at prior times in U.S. history.

The fact that Parallax Financial Research's bottom-up model reaches a similar conclusion should reinforce why we all should be worried.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

-Mark Hulbert

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11-25-25 1054ET