Market Valuation, Inflation and Treasury Yields

Core Insights - US stock indexes are significantly overvalued, indicating cautious expectations for investment returns [1] Market Valuation (P/E10) and Inflation - The P/E10 ratio is a key indicator of market valuation and its correlation with inflation shows crucial patterns across three distinct periods: January 1881 to December 2007, January 2008 to February 2020, and March 2020 to present [2] - The current P/E10 stands at 38.6, with a year-over-year inflation rate of 3.05%, placing it just outside the historical "sweet spot" of 1.4% to 3.0% inflation, which has supported higher market valuations [3] Market Valuation (P/E10) and the 10-Year Treasury Yield - The correlation between P/E10 and the 10-year Treasury yield has been examined since 1960, revealing that the post-financial crisis period saw P/E10 ratios above 20 with yields below 2.5%, deviating from historical patterns [4][5] - The current yield of 4.12% suggests a shift away from the unprecedented low yield environment towards a scenario reminiscent of the tech bubble [5] Historical Context - The historical average P/E10 is 17.6, providing a benchmark for current valuations, which are currently in extreme valuation territory [6] - The inflation "sweet spot" is highlighted as a range historically associated with higher valuations, while the current P/E10 and inflation rate are marked for comparative analysis [6][7]