BMO's Jack Ablin: Stock market is overvalued by 5 to 10 percent

Jack Ablin, BMO Private Bank
Peter Foley | Bloomberg | Getty Images

Stock market returns are a function of three factors: dividends, earnings growth and valuation adjustments, the latter being measured by the change in the price-earnings ratio. Projecting earnings and dividend growth is critical for forecasting market performance over long time frames. That's why investment firms and analysts spend so much time trying to get the numbers right. Distortions occur when the market becomes misaligned with fundamentals and PE ratios expand or collapse to unsustainable levels, with the late 1990s tech bubble and the post-Lehman wreck being the two most notable extreme examples.

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