FCF growth and returns to shareholders helps explain some of the P/E expansion in the S&P doesn't it?

FCF margin is cyclical. If there is an upswing, perhaps some of that upswing is permanent, perhaps not. (usually not, but I'm open minded). The portion that is not permanent means it's just a short term squiggle, and stocks aren't worth any more than before the upswing. Farms aren't worth more in harvest season than they are in the winter...both situations come and go repeatedly. Only to the extent that the upswing is permanent are stocks worth any more.

Yes, it helps explain the P/E expansion (though not justify it): markets always pay a higher multiple of temporarily elevated earnings, as the average stock buyer has a short memory. It was ever thus.

Then margins fall again, and stock markets fall, and usually pay a low multiple of temporarily low earnings--just when they should be paying a higher multiple because the earnings are only temporarily low. Earnings were very low cyclically in 1983, and people wouldn't pay more than 10 times that temporarily low number. That's around the time that Mr Buffett spoke of his somewhat off colour "harem" feeling.

Jim