Why High Stock Market Valuations May Be the New Normal

A Federal Reserve study argues that structural shifts in labour income, investment patterns and corporate cash flows explain why traditional valuation ratios may no longer revert to historical average

For decades, investors have relied on valuation ratios such as the price-to-earnings (P/E) ratio or earnings yield to judge whether stock markets are overvalued. Yet these metrics have remained persistently elevated relative to historical norms since the late 1990s. A recent study titled A Macroeconomic Perspective on Stock Market Valuation Ratios examines this puzzle through a macroeconomic lens and suggests that structural changes in the economy may explain why these ratios have stayed high for so long.