Stocks Are Historically Pricey: While Some Analysts Suggest This Is "the New Normal," It's Not as Cut-and-Dried As You Think

Core Viewpoint - The current high valuations in the stock market, particularly the S&P 500, are being justified by some analysts as a "new normal" due to factors like the rise of AI and historical changes in market dynamics, despite historical data suggesting that such high valuations often precede significant market declines [2][3][10][18]. Group 1: Market Valuation Trends - The S&P 500's Shiller price-to-earnings (P/E) ratio has reached levels not seen in over 150 years, indicating that the current stock market is the second-priciest in this timeframe [4][6][13]. - Analysts like Savita Subramanian from Bank of America argue that current multiples should be considered the new normal rather than reverting to historical averages [3][5]. - The Shiller P/E ratio has historically indicated that readings above 30 are unsustainable and have led to declines in major indexes ranging from 20% to 89% in the past [14][15][17]. Group 2: Historical Context and Market Dynamics - The rise of the internet in the mid-1990s began a shift in market dynamics, breaking down information barriers and contributing to a new valuation norm [7][8][10]. - Lower interest rates from 1990 through the 2010s have made capital cheaper, encouraging borrowing for growth, which has also influenced stock valuations [9][10]. - The current market's high valuations are not solely due to AI advancements; they are part of a broader trend that has been developing for decades [10][18]. Group 3: Potential Risks and Market Behavior - Despite the optimism surrounding AI, many companies are not yet realizing returns on their AI investments, suggesting a potential bubble [18]. - Historical patterns show that every major technological trend over the last 30 years has faced a bubble-bursting event, indicating that current high valuations may not be sustainable [16][18]. - The ongoing instance of the Shiller P/E exceeding 40 during the current bull market raises concerns about future market corrections [17].