The valuation argument

The Shiller P/E ratio on the US market has now moved above 42x, one of the highest valuation readings in more than 150 years of history. The Shiller P/E, also called the CAPE ratio, compares today’s market valuation with the average inflation-adjusted earnings of the past 10 years in order to smooth economic cycles. Only the dot-com bubble reached higher levels.
Valuations have never been a good timing indicator, but they do provide important context for future return expectations. The key questions are therefore simple: will earnings growth be structurally higher going forward because of AI, and will interest rates move lower again over time? We would be prudent to answer yes to both.
Unlike 2000, today’s market leaders are highly profitable, cash generative and deeply embedded in the global economy. At the same time, the AI investment cycle is real and continues to support earnings growth.
Still, when starting valuations are this elevated, investors should not fall asleep at the wheel. High valuations do not prevent markets from rising further, but they reduce the margin of safety.