Stocks are still expensive — here's why: Trader

Turmoil in the global markets sent U.S. equities tumbling this week, with the S&P 500 Index and Dow Jones industrial average posting their worst beginning to a year in history and shaving trillions off major equity indexes.

Despite a sell-off that sent the Dow and the Nasdaq Composite into correction territory, one widely followed market participant told CNBC that stocks are still expensive.

"I don't think we're going to be able to maintain this average multiple," Carter Worth, head of technical analysis at Cornerstone Macro told CNBC's "Fast Money" this week. He referred to the S&P's current price to earnings (P/E) multiple, a common measure to gauge the market's value.

As the stock market has been in a record-breaking bull market for the last several years, valuations have become sky-high: The S&P 500 sports a trailing multiple of 17.4 times earnings.

Worth pointed to what he called some of the more expensive stocks in the market right now — Nike, Home Depot, Costco, Under Armour, Monster Beverage and McDonald's. Those names sport P/Es of 29, 24, 30, 79, 48 and 24, respectively — examples of just how pricey stocks have become.

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Given tepid earnings expectations in 2016, Worth said that if the market were to return to its historical multiple, the S&P 500 could fall as much as 7 percent from its current level.

"The long-term average is 16.1 times," said Worth. "If we assign the S&P 500 a 16.1 multiple instead of 17.4, which is higher than where we were in the 2007 peak … [it] would put you exactly on [the long-term trendline]," he added.

A move to the bottom of the uptrend channel that's been in place since the 2008 lows would have the S&P 500 targeting 1,800, or even lower. On Friday, the index traded near 1,950.


According to Worth, the market has become so overstretched that the S&P 500 could break below that average multiple, which would send it as low as 1,600.

"Mean reversion is a powerful principal," said Worth. "Things that overshoot, typically undershoot."