About Bubble Tracker

Whether markets are “overvalued” depends on both the lens you use and the horizon you care about. Different ratios ask different questions: P/B asks how far price stands above recorded equity; Forward P/E asks how dearly investors are paying for expected near-term profits; CAPE asks how price compares with a long-run, cycle-smoothed notion of earnings power. Horizons differ too—six-month outcomes are driven by flows, risk appetite, and news; decade-long outcomes tend to reflect the gravity of starting valuations.

Relative to their own histories, broad U.S. valuation ratios have often been elevated in recent years—especially Forward P/E in low-rate regimes and CAPE during long profitability booms. That points to lower long-run expected returns versus cheaper starting points. It does not reliably time the next 6–12 months.

A constant-growth sketch helps: P/E ≈ 1 ÷ (r − g), where r is the discount rate and g is earnings growth. When real yields fall, (r − g) shrinks and the same profit stream is worth more today—multiples rise even if earnings are flat. If multiples rise without EPS upgrades, price is doing the work and the advance is fragile. If EPS is revised higher, earnings—not just optimism—carry the move.

P/B needs care in an intangible-heavy world. Because many intangibles are expensed rather than capitalized, book value can understate the assets that generate profits—making P/B look “expensive” even when pricing is sensible. CAPE earns its keep by smoothing the cycle; it has historically been more informative for ten-year horizons than ten-month calls. Its level can drift with structural shifts (taxes, sector mix, margins, accounting), so context matters.

Literature (high level): valuation ratios are among the stronger predictors of multi-year equity returns, while short-run returns are dominated by flows, risk appetite, and macro shocks.

• P/B is sensitive to sector mix and accounting (intangibles make book value light); extreme levels flag balance-sheet richness.
• Forward P/E moves with discount rates and earnings expectations; multiple expansion without EPS upgrades is a caution sign.
• CAPE smooths the cycle and aligns better with long-horizon returns than with short-term timing.

“Decoupling” appears when asset prices—claims on future cash flows—move differently from today’s GDP or employment. Markets discount the future; macro data mostly describes the present and recent past. When the distance between those realities widens, prices can rise even as current activity looks soft.

In practice, these episodes are cyclical. As rates stabilize, margins re-anchor, or growth expectations reset, gaps between market pricing and Main Street conditions tend to narrow. Timing is irregular; the mechanism—valuation responding to discounting arithmetic and index-earnings composition—is consistent.

Decoupling tends to be cyclical: as rates, margins, or expectations re-anchor, gaps narrow.

• Rates & discounting: Falling real yields raise the present value of distant earnings, lifting multiples even during slow growth.
• Composition: Index profits are global and tech-heavy; domestic macro data can understate listed-firm fundamentals.
• Margins & intangibles: Persistently high margins and intangible-heavy models decouple profits from measured tangible investment.
• Policy & liquidity: Backstops and QE can compress risk premia, supporting prices even as activity lags.

Asset inflation and consumer inflation share a word but not a mechanism. Asset inflation is rising prices of stocks, bonds, real estate, and other claims on income. Consumer inflation (CPI) measures the changing cost of a household basket. Asset prices are most sensitive to discount rates, growth expectations, and risk appetite; CPI is shaped by wages, supply chains, energy costs, and policy. Because the drivers differ, the two can move in opposite directions.

This distinction matters. Asset inflation primarily benefits asset holders, while CPI touches nearly everyone. A period of strong asset gains with subdued CPI feels very different across the distribution than a period with hot CPI and pressured equity multiples. Policy choices—on rates, liquidity, and fiscal backstops—can compress risk premia without guaranteeing broad equity gains; earnings, growth, and sentiment still matter.

• Lower real rates → higher present values → richer multiples.
• Policy affects term and risk premia but doesn’t map one-for-one to equity prices.
• Distribution matters: asset inflation benefits owners; CPI affects households broadly.

Treat valuations as a compass for multi-year expectations, not a clock for the next quarter. Read several lenses together, adjust for context (real yields, structural margins), and ask what is doing the work when prices move. If multiple expansion dominates without EPS upgrades, the advance rests more on optimism and is vulnerable to rate or sentiment shifts. If earnings revisions lead, footing is firmer. In intangible-heavy sectors, supplement P/B with cash-flow yields or price-to-sales so book-value gaps don’t mislead you.

Keep the constant-growth approximation in mind: P/E ≈ 1 ÷ (r − g). If r drops from 6% to 5% while g is 2%, implied P/E rises from ~25 to ~33 purely from discounting. Separately, if earnings are flat and the market’s P/E climbs from 15 to 20, prices rise ~33% from multiple expansion alone. Not forecasts—just a reminder that modest shifts in rates or assumptions can move valuations a lot.

P/E up, EPS flat, real yields steady → flows and enthusiasm are doing the lifting (fragile).

Turn principles into a repeatable workflow: locate today’s valuations vs. history, diagnose whether moves came from rates, earnings revisions, or composition, and align your take with the horizon that matters for your decision.

No single metric rules them all. Sector and region mix evolve, so “today’s market” rarely mirrors “yesterday’s average.” Valuation is blunt for months and sharper for years. Accounting mechanics—from goodwill write-downs to the EPS effects of buybacks—can color readings more than many realize.

Book value: Shareholders’ equity (assets minus liabilities) from the balance sheet.

Forward P/E: Price divided by next-twelve-months expected earnings per share (EPS).

CAPE (Shiller P/E): Price divided by a 10-year average of inflation-adjusted earnings to smooth cycles.

Discount rate / real yield: The rate that brings future cash flows back to today; real yields subtract expected inflation.

Multiple expansion: Prices rising faster than fundamentals—paying more per dollar of earnings.

Risk premium: The extra return investors seek over safe assets; compressed premia support higher prices.

Term premium: Extra yield for holding long-term bonds instead of rolling short-term ones.

Intangibles: Economic assets like software, brands, data, and networks that accounting often undercounts.

For longer histories and primary data, these sources are a good start. They show how valuation, discount rates, and earnings interact across cycles and structural shifts.