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So, I guess it's a bull market. The 99 day rule is reset to day 0.
https://stockcharts.com/h-sc/ui?s=$SPX&p...

It also seems to be an expensive bull market. I track smoothed real earnings for US stocks, same idea as the E10 in CAPE but just smoother. On that metric, the S&P 500 and its predecessors has been more expensive than this about 3.1% of weeks since 1916, 108.5 years ago. Using one data point per week, all of those exist in three stretches:
124 weeks 1998-03-20 through 2000-12-08, the tech bubble top.
40 weeks 2021-04-09 through 2022-01-14
15 weeks 2024-10-18 through 2025-02-21
And now, of course.

Using my smoothing and scaling, the trend earnings yield is currently 2.84%, equating to a P/trendE of 35.2.
A quick-and-dirty but surprisingly good fit to the data since 1990 is that the forward ~7 year real total return is usually in the range of 5 times the starting trend earnings yield, minus 15%. (That's with the endpoint smoothed, so in effect the average CAGR across all hold periods in the 4-10 year range). If that rule had any merit, it would suggest a ~7 year real total return from the S&P 500 of about -0.8%/year.

We live in interesting times.

In the tech bubble, the US was the miracle stock market and money poured in from across the globe, driving the dollar up. Much like the recent bull market. The trade weighted dollar index rose from about 81 in spring 1995 to peak around 121 in 2000-2002. When the optimism faded, the portfolio flows did too, and so did the US dollar. The index fell from 121 to about 85 by end 2003, and continued on down to below 72 over the next five years.
I mention this because it raises the question of what effect, if any, changing international portfolio flows might have on the US dollar value in the next few years. In 2011-2022, the hardest charging part of the recent bull market, the US dollar index rose from 74 to 114. It has pulled back to 97. Purely from a chart, a drop to ~80 seems entirely possible if the things holding it up no longer apply. So, for example, an index rise of 20% from here over the same time frame might mean an increase in wealth (general purpose purchasing power) of zero.

Jim

Something that's been bouncing around in my head for a while:

Do you think the collective market could be pricing in massive expected productivity growth over the next ~10 years driven from AI, which would make current prices relative to pretty much any valuation metric look highly inflated for companies that are best positioned to benefit. Companies which, in this case, may also be the largest ones with the most expertise and capital, like the S&P500?

An analogy would be a single high growth company like Amazon trading at a rich premium to their current earnings for years, because the market is anticipating high future earnings growth - which in some cases does materialize. But in this case, we're talking a large swath of companies in a position to grow rapidly as beneficiaries of AI.

In that scenario, if AI expectations were to deliver, today's overinflated valuations could quickly turn into reasonable valuations in the near future with rapid earnings growth, without a crash along the way. (To the detriment of anyone who limited market exposure due to valuations.)

Do you think the collective market could be pricing in massive expected productivity growth over the next ~10 years driven from AI, which would make current prices relative to pretty much any valuation metric look highly inflated for companies that are best positioned to benefit. Companies which, in this case, may also be the largest ones with the most expertise and capital, like the S&P500?


Sure. But one could abbreviate that to "the market is pricing in [some narrative] and overpaying as usual".

If some novel "displacement" makes a firm more profitable that's good, but the increase in price due to that displacement almost always exceeds the average improvement in business prospects. Solid fast-growing firms are certainly worth more than boring slow-growing firms, but the world seems full of people happy to pay three times as much for a company with twice as good a future. Plus, of course, there is the problem that technology diffuses. If all firms become more productive, no firm becomes more profitable, as they almost all have competitors.

There will be a few giant winners of course, as there are in any five year stretch. The problem is that nobody really knows in advance which ones they will be, so the only thing you can rationally focus on when estimating future returns is how the average will do.

What will LLM models do to the trajectory of (say) future US real GDP growth? Maybe 3% higher a decade from now than it would otherwise have been? 5%? Maybe 8%? What is that per year? Since there is only so much GDP to be split among companies, individuals and taxes, in aggregate the present value of all future corporate profits won't be that much different. Better? Sure, I won't argue. Enough better to deliver good returns starting from these valuation levels? Nope.

The broader problem is that US valuations are pretty stretched even for boring middle-of-the-pack firms. I track as a metric the median P/S among the largest 400 non-financial S&P 500 firms. The tech bubble peaked at 1.639:1. The 2007 credit bubble peaked at 1.844:1. In the whole of US history up till October 2013, this never exceeded 2:1. Around 2019 it passed 3:1 for the first time. The current figure is 3.584:1.
Is each dollar of sales at a boring middle-of-the-pack big firm really worth more than twice its average since 1997?

Jim

This calls to mind an old article by a guy called ivanhoff.
The tidbits:

Prices don’t change when fundamentals change. Prices change when expectations and perceptions change and they could change for various reasons. From a trend follower’s perspective, the main indicator that signals changes in expectations is price.

Aren’t you glad you are a trend follower? Leaving aside the potential performance advantages of trend following for a moment, it is just less drama. Case in point, as a trend follower you can avoid getting caught up in the endless debate about whether or not the market is overvalued.

Case in point, as a trend follower you can avoid getting caught up in the endless debate about whether or not the market is overvalued.

No doubt this has merit. Whether the market is overvalued or not has almost zero bearing on whether prices will go up or down next, so it is almost perfectly useless as a buy or sell indicator.

But valuation has a lot to say--more than anything else--on what a sensible expectation is for the next 5-10 years, for retirement planning or whatever. Anybody holding the broad US market and planning to hold it for several years should be entirely prepared for poor real total returns. They might get more, they might get less, but the best central guess is "not very much at all".

One's choices are limited at such times. Don't hold the broad US market. Plan for and accept the likelihood of low returns. Buy things which are individually reasonably priced relative to their prospects, with or without looking outside the US. Try your hand at timing, whether it's trend following or something else. Invest in things other than stocks. Start a company. Head to Vegas or try day trading. Give all your money away and become a monk.

All that being said, there is a saying: when Mr Market is offering you a crazily high price for something you own, you should at least think twice before turning him down : )

Jim

Jim,

Getting back to your concept of the "North Atlantic" currency, as well as evaluating the US Dollar Index, let's ignore the numerical rise in the stock market in terms of USD and reevaluate its trend in terms of relative to a "global wealth index". The US Dollar Index started 2025 at about 110 and is currently at 97 - meaning that, evaluated in terms of USD the value of our assets has evaporated to the tune of 12% in six months.

While the equity market is largely a psychological beast, what is the literal change in the market's trajectory taking the loss of the participants' wealth? (And does that impact the 99-day rule)?

Jeff

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