investmentwatchblog.com / by· Published
“Valuations are still well below the peak of 1999” say the bulls. They are certainly correct from an absolute basis but we caution that the current level of market euphoria is in a league of its own when compared to prior peaks on an “apples to apples” basis.
The following table compares earnings growth and implied market expectations for earnings growth from the two prior CAPE (Cyclically-Adjusted Price-to-Earnings) peaks to today. CAPE is the price of an equity index, such as the S&P 500 in this case, divided by the average of ten years of earnings adjusted for inflation. Implied market earnings growth is the rate of earnings growth required for the next ten years to return CAPE to its historical average assuming no price changes.