Market Valuation, Inflation and Treasury Yields: December 2025

Group 1 - The relationship between market valuation (P/E10) and inflation shows significant patterns across three distinct periods: January 1881 to December 2007, January 2008 to February 2020, and March 2020 to the present [1] - The current P/E10 stands at 39.8, with a year-over-year inflation rate of 2.22%, indicating that the market is within the "sweet spot" of 1.4% to 3.0% inflation, historically associated with higher valuations [2] - The historical average P/E10 is 17.7, providing a benchmark for assessing current valuations, which are significantly higher than this average [3] Group 2 - The extreme overvaluation during the tech bubble (June 1997 to January 2002) is characterized by a P/E10 of 25 or higher, highlighting the risks associated with current valuations [3] - The shaded red area in the graph indicates the inflation "sweet spot" (approximately 1.4% to 3.0%), a range historically linked to elevated market valuations [3]