The talk of overvaluation always has to be placed in context. It has to be given a number. High P/E levels are associated with lower future returns. This is a strong headwind. Does this mean that stocks will fall soon? That is less clear. The equity risk premium is falling, but it is still wider than it was during the tech bubble. There is also evidence that forward returns will be higher than what is predicted by valuations.
Our concern is the catalyst that will cause a decline. High valuations coupled with macro shocks are the combination that will send stocks lower. The real macro economy is not as healthy as many think. Consumer sentiment is lower. Survey diffusion data is at best neutral but tends to suggest a slower economy. Shipping is down. While the Fed may not lower rates because of inflation worries, there should be growing concern about economic growth.
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