The market is a constant argument over the right price to place on an unknowable future. Yet nearly all market players agree on one thing: U.S. stocks aren't cheap.
The disagreement surrounds just how expensive they are, whether it's justified and whether valuation "matters" for now.
There are many ways to portray how equities are valued versus companies' profits and their future cash flows.
Among the most conservative – some would say punitive – methods, is Robert Shiller's Cyclically Adjusted Price/Earnings ratio, based on the past 10 years' reported earnings for the S&P 500. That ratio is above 29, a level only exceeded in the past century during the late-'90s bubble years. (Of course, this measure has looked "too high" for much of the past decade, as the market has continued marching higher.)
Then there's the "trailing" and "forward" P/E. Based on last year's operating profits, the S&P is just above a 19 multiple; on the consensus forecast for 2017 results, a bit over 18.
Whatever gauge is used, stocks are more expensive than they've been at any point of this economic cycle and since the last major bear market ended -eight years ago this Wednesday. The immutable math of investing says the richer valuation you pay, the lower your expected long-term returns.
So why are investors willing to pay up for stocks at relatively stout valuations, in the form of heavy equity-fund inflows, during this impressively persistent phase of the rally?