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Historical comparisons are not valid for a lots of reasons. Valuation levels need to reflect that. A few of the most important changes 1. In the past say 1880 or 1900 or 1920 or 1940... no one can put together a diversified portfolio of stocks at a cost less than 2% per year in expenses. That is direct expenses. Then you have insufficient information, risk with paper stock certificates, fraud, etc in buying stocks. Even if you ignore these indirect expenses, at a minimum you are paying 2% fees annually (brokerage costs, bid ask spreads, over the typical holding period) and unit trusts had loads and annual fees that averaged these as well. So if stocks returned 6.5% real, you still ended up with 4.5% returns and at best not in a very diversified way. Now an investor can buy total stock market fund at 3 bps. To get the same returns as in the past in a much more convenient way, investors can pay a lot more due to lower costs. 2. As much as many look down at economists and central bankers, they did learn a lot. The great depression - the bogeyman for many stock investors, is not going to happen again. We had a good practice run in COVID. Should something really bad happen short of a worldwide annihilation event (when your portfolio would be of little value/use anyway) you can predict what Fed would do. No points for guessing. You should be able to guess what politicians would do (Trump to Biden and everyone in between) - spend and spend some more. And they wont be wrong. This takes away the greatest risk to stock markets - that aggregate spending would fall i.e. consumers would not be able to spend money. Thus companies revenues are protected. This is a dramatic change from the past. If risk is lower, it is only natural to expect higher valuations and lower returns in future. 3. People also have wised up. They are not stupid. They do have 150 years of data that shows, every single time the stocks crashed, it was a buying opportunity. Short of a revolution (Russia, Germany, Japan...) when it does not matter what you hold (ok gold to some extent) everything is going to be worthless. Short of that, it is clear to anyone and their dog, that buying when stocks are down is a no-brainer. 4. In the past people worked until they dropped dead. Now people spend several years in retirement. For that they save (not everyone, but anyone who has wealth) and invest in the stock market. 401k, ira, etc. Everyone paycheck vast sums get deposited into these and they are automatically invested in markets. To expect stocks to get to a PE of 7 or 10 is stupid. Not going to happen except for very very brief amount of time - a few days at most. So valuations are going to average much higher in future. Vinod

Shiller PE is 32 and has been 25+ for almost the last entire decade. https://www.multpl.com/shiller-pe I prefer it to using raw PE from TTM because it should smooth out cyclicality. But as I said it doesn't adjust for changes in risk free interest and tax rates (but claims to adjust for inflation). I've always wanted to take the time to try to make those adjustments to see if with those adjustments match market prices to valuation better, but I suspect it won't make a huge difference as the market is a very complex beast that defies description by formula. Momentum is just one example. Let's assume the markets fair value PE should always be 19. But anyone who bought and held in the period from 2009 to 2022 made out like bandits from increasing PE ratios. So even if they now think it is overvalued at a 26 PE, why would they sell and abandon what has worked so well? Who is to say it won't trade well above a 30 PE in a few years? And if the overwhelming sentiment remains to buy dips and hold, no matter what a DCF valuation says, then this pattern can't break until a long bear market. Nine months in 2022 wasn't enough to break the majority belief built over the previous 144 months that dip buying will always pay. Its exactly why Ben Graham told that old joke to describe how powerful momentum is in the market: