[jfengel]

The real value is in earnings. Pricing in future revenue requires a crystal ball but it is clear that the market capitalization has grown faster than revenue.

Earnings do not justify the price, for the market as whole. There is only so much earnings to be had. It is overvalued by the metric of dividends or property (retainer earnings).

[Esophagus4]

I agree with you that price is some kind of signal about earnings. However:

> Earnings do not justify the price

… maybe? I’m not sure I believe you conclusively, so you would have to prove this before I accept it.

PE ratios are higher than historical averages (according to Perplexity, S&P PE is 27, which is higher than the median of 18. The top 10 holdings hover between 12 and 80, excluding TSLA which is over 200).

However, I could see reasonable rationalizations for these PEs that could tell me that they’re expensive compared to historical trends, but not “overvalued.”

Maybe investors are assuming technological change will drive accelerating earnings growth (especially true for the top tech stocks) more than we’ve experienced historically. Top tech stocks are more efficient cash generating machines than they’ve ever been before, and the S&P has shifted to high multiple sectors like tech and away from lower multiple sectors like energy and financial services. So it’s possible our understanding of “expensive” stocks is miscalibrated if we just look at historical PE ratios.

I can’t say for sure that equities are priced “reasonably,” but I can say you haven’t convinced me they’re overvalued.

[jfengel]

18 is exactly what he number I mean by overvalued. It corresponds to an interest rate of about 4%. You can do better in zero risk bonds. And that's for 18; 27 is just not reasonable.

And the S&P.has been going up much faster than 4%. If there was ever a point where it was properly valued it must be overvalued now.

The S&P index isn't the whole story, especially in an expanding tech economy. But still, I'm looking at it as an absolute, rather than a relative number, and it strongly suggests that earnings cannot justify these pricings, even when we're not at the top of a bubble.

[Esophagus4]

Good point.

The only “yes, but…” I would add is that it seems to my retail, unsophisticated eye that:

1) while you could do better nominally in bonds, it seems like investors are pricing in a lot of earnings growth, not just static earnings in PE.

2) the market expects inflation, and blue chips can typically raise prices during inflation which protects shareholders, whereas bonds don’t offer this protection, other than TIPS etc

3) it also seems like (for now…) US equities are still a safe haven for international capital, so demand is still there (i.e. there is no alternative)