Valuation Concentration?

The transformational upward shift in U.S. stock market valuations appears to be broad-based across nearly “all” parts of the stock market.

Valuation metrics for the stock market have been a conundrum for the last several decades. As demonstrated in chart 1, the valuation range of the U.S. stock market has gone through a considerable transformation since the middle-1990s, leaving a number of critical questions in its wake.

Chart 1 shows the famed Shiller CAPE Price-Earnings (PE) multiple for the U.S. stock market since 1900. Between 1900 to about 1994, PE valuations exhibited a very consistent range between about 7 to 21 times earnings. For nearly 100 years, it was possible to judge how cheap or expensive the stock market was by comparing its current valuation to this tried-and-true persistent range. Generations of investors learned that single-digit PE markets were a bargain and any market PE approaching 20 warranted caution.