What if 40x earnings isn’t overvalued anymore?
Picture the environment we are already halfway living in. Economic growth is mediocre at best. Productivity gains are weak. Real wages lag. None of that matters. Liquidity is abundant and relentless. Bonds guarantee negative real returns. Cash is a melting ice cube. Housing is inaccessible to anyone without existing assets. Capital is forced into equities not because they are attractive, but because they are the least bad option left. Under those conditions, valuation multiples do not expand because optimism is high. They expand because participation is compulsory. Fifty or sixty times earnings stops being a bubble and starts being the logical endpoint of a broken system.
The distortion becomes even more pronounced at the index level. Liquidity does not spread evenly. It concentrates. A shrinking handful of mega-cap, politically connected, systemically important companies absorb the vast majority of flows. Index concentration explodes. These firms trade at cartoonish multiples while the median stock goes nowhere. Analysts point to the index and declare the market healthy, conveniently ignoring that it is being propped up by a tiny oligarchy of stocks that have effectively become financial utilities. Comparing today’s index valuations to those of the past becomes meaningless because the index itself no longer represents the market it once did.
https://quoththeraven.substack.com/p/valuations-dont-matter-when-money