The stock market valuation chart we want now but can’t have until 2035

A version of this post first appeared on TKer.co

Many popular valuation metrics suggest that the stock market is expensive, implying that investors should expect weak returns over the years to come.

Unfortunately, all valuation metrics are far from perfect, and their signals can lead you astray.

Let’s quickly review three popular valuation ratios:

• Forward price-to-earnings (P/E): At about 22x, this ratio is above its historical averages. Investors like this metric because it’s based on earnings expected over the next 12 months or next calendar year, and the theoretical value of a stock is closely tied to a company’s future earnings. Unfortunately, most of a company’s value is derived from the earnings generated in the many years beyond the next year. So, the one-year forward P/E lacks scope.

• Trailing P/E: At about 28x, this ratio is significantly above its historical averages. It’s calculated using earnings from the past 12 months or the past calendar year. Its strength comes from the fact that these are realized earnings, not guesses. But the obvious disadvantage is that it’s backward-looking, while the stock market is forward-looking.

• Cyclically-adjusted P/E (CAPE): At 40x, CAPE is at its highest level since the dot-com bubble. This ratio is a form of trailing P/E, but the E is an average of the past 10 years’ earnings. Popularized by Nobel Prize winner Robert Shiller, CAPE’s strength comes from smoothing out short-term noise, as earnings can be volatile from one year to the next. But again, the major disadvantage is that it’s backward-looking.

Ideally, your valuation model would consider many years’ worth of future earnings (which, by the way, is how discounted cash flow models work.) Obviously, that’s not easy to do. It’s hard enough to predict next quarter’s earnings.

But what if there were a P/E ratio where the E was based on the next 10 years’ earnings? It would be a ratio that combines the strengths of the forward P/E and CAPE.

This sparked a thought exercise on X last week.

While we can’t accurately predict earnings through 2035, we have the ability to go back in time to 2015 and beyond to calculate what this “forward-realized CAPE” would’ve been based on actual earnings reported.

In other words, up to 2015, we can calculate a valuation ratio using the average of the next 10 years’ realized earnings to understand whether the market was actually cheap or expensive at the time.

Credit to Jake (@EconomPic on X) for already having thought of this a year ago.

In the chart below, you have Shiller’s CAPE in red and the CAPE based on forward-realized 10-year earnings in blue.

In mid-2014, Shiller’s CAPE was at about 26x, significantly above its long-term average of about 17x. By this metric, the market looked expensive, which meant investors should’ve expected weak, low-single-digit returns.

But the realized CAPE at the time was about 17x. Eyeballing it, this metric was roughly in line with its long-term average and below its average from the prior 20 years.

The realized CAPE was telling us the market was not expensive in 2014. Why? Because earnings growth proved healthy in the years that followed.

“Important re-framing,” Bloomberg’s Joe Weisenthal said about the chart. “People like to blame the Fed or ETF flows for the big bull market. But the fact of the matter is that the realized earnings of big American companies have been extraordinary both on an absolute basis and also on a relative (to estimates) one for years.”

So, where is the forward realized CAPE today?

Unfortunately, we won’t know until 2035.

That’s the nature of investing — you are betting on an uncertain future.

Sure, the forward 12-month P/E, the trailing P/E, and the Shiller CAPE might all suggest the stock market is expensive. AND all of these metrics are much higher today than they were 10 years ago.

But maybe the market is being bolstered by bullish investors convinced the next 10 years of earnings growth will be robust, effectively wagering that in 2035, we’ll learn that the blue line in Jake’s chart is attractive when it gets to 2025.

Will those investors be proven right?

I’ll be sure to write a follow-up piece then.

There were several notable data points and macroeconomic developments since our last review:

🎈 Inflation heats up. The personal consumption expenditures (PCE) price index in August was up 2.7% from a year ago. The core PCE price index — the Federal Reserve’s preferred measure of inflation — was up 2.9% during the month. While it’s above the Fed’s 2% target, it remains near its lowest level since March 2021.

On a month-over-month basis, the core PCE price index was up 0.2%. If you annualize the six-month trend in the monthly figures — a reflection of the short-term trend in prices — the core PCE price index was up 3.0%.

For more on inflation and the outlook for monetary policy, read: Fed Chair Powell: It’s a ‘challenging situation’ ⚖️ and The other side of the Fed’s inflation ‘mistake’ 🧐

🛍️ Consumer spending ticks higher. According to BEA data, personal consumption expenditures increased 0.3% month-over-month in August to a record annual rate of $21.11 trillion.

Adjusted for inflation, real personal consumption expenditures increased by 0.3%.

For more on consumer spending, read: We’re at an economic tipping point ⚖️ and Americans have money, and they’re spending it 🛍️

🏭 Business investment activity improves. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — increased 0.6% to $76.7 billion in August.

Core capex orders are a leading indicator, meaning they foretell economic activity down the road.

For more on the major macro metrics, read: We’re at an economic tipping point ⚖️

💼 New unemployment claims fall, total ongoing claims remain elevated. Initial claims for unemployment benefits declined to 218,000 during the week ending Sept. 20, down from 232,000 the week prior. This metric remains at levels historically associated with economic growth.

Insured unemployment, which captures those who continue to claim unemployment benefits, declined to 1.93 million during the week ending September 13. This metric is near its highest level since November 2021.

Low initial claims confirm that layoff activity remains low. Elevated continued claims confirm hiring activity is weakening. This dynamic warrants close attention, as it reflects a deteriorating labor market.

For more context, read: The hiring situation 🧩 and The labor market is cooling 💼

💳 Card spending data is holding up. From JPMorgan: “As of 16 Sep 2025, our Chase Consumer Card spending data (unadjusted) was 2.9% above the same day last year. Based on the Chase Consumer Card data through 16 Sep 2025, our estimate of the US Census September control measure of retail sales m/m is 0.17%.”

From BofA: “Total card spending per HH was up 1.8% y/y in the week ending Sep 20, according to BAC aggregated credit & debit card data. Y/y electronics spending soared in the week ending Sep 20 partly due to earlier iPhone launch this year (9/19/25 vs 9/20/24). However, total card spending ex electronics was up a still stable 1.6% y/y in the week ending Sep 20.”

For discussion on how sales may be inflated due to tariffs, read: A BIG economic question right now 🤔

⛽️ Gas prices decline. From AAA: “The national average for a gallon of regular dropped five cents since last week to $3.15. Fall is officially here, bringing lower gas prices and winter-blend gasoline which is cheaper to produce. Pacific Northwest drivers are getting some relief now that a pipeline issue has been resolved and pump prices are trending downward. The Atlantic hurricane season is halfway over, but the tropics remain a concern for the next two months if there’s storm activity in the Gulf that affects refineries in the area.”

For more on energy prices, read: Higher oil prices meant something different in the past 🛢️

👎 Consumer confidence ticks lower. From the University of Michigan’s August Surveys of Consumers: “Although September’s decline was relatively modest, it was still seen across a broad swath of the population, across groups by age, income, and education, and all five index components. A key exception: sentiment for consumers with larger stock holdings held steady in September, while for those with smaller or no holdings, sentiment decreased.”

🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.30%, up from 6.26% last week: “Following several weeks of decline, mortgage rates inched up this week. Housing market activity continues to hold up with purchase and refinance applications increasing by 18% and 42%, respectively, compared to the same time last year.”

There are 147.9 million housing units in the U.S., of which 86.1 million are owner-occupied and about 39% are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

🏘️ Home sales tick lower. Sales of previously owned homes decreased by 0.2% in August to an annualized rate of 4.0 million units. From NAR chief economist Lawrence Yun: “Home sales have been sluggish over the past few years due to elevated mortgage rates and limited inventory. However, mortgage rates are declining and more inventory is coming to the market, which should boost sales in the coming months.”

August’s prices for previously owned homes declined month over month, but rose year over year. From the NAR: “The median existing-home sales price for all housing types in August was $422,600, up 2.0% from one year ago ($414,200) – the 26th consecutive month of year-over-year price increases.”

From Yun: “Record-high housing wealth and a record-high stock market will help current homeowners trade up and benefit the upper end of the market. However, sales of affordable homes are constrained by the lack of inventory.”

For more on housing, read: The U.S. housing market has gone cold 🥶

🏘️ New home sales surge. Sales of newly built homes jumped 20.5% in August to an annualized rate of 800,000 units.

Wells Fargo economists cautioned against reading too much into the increase: “The surge reflects slightly lower mortgage rates and an increase in builders offering buyer incentives. Take the gain with a huge grain of salt. New home sales are prone to heavy revisions. A flat-ish trend in sales, similar to what has been evident all year, seems more likely.”

🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 65.4% on Tuesday last week, up one tenth of a point from the previous week and a new single-day post-pandemic record high. Austin experienced the highest single-day occupancy of any tracked city since the pandemic on Wednesday, reaching 84.9%. The city also saw increases of more than two points on both Monday and Tuesday. Other significant increases on Tuesday included San Jose, up two and a half points to 62.6%, and Chicago, up nearly a full point to 73.2%. The average low was on Friday at 36.6%.”

For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢

👎🤷 Activity survey signals cooler economic growth, lower inflation. From S&P Global’s September U.S. PMI: “[T]he monthly profile is one of growth having slowed from its recent peak back in July, and September saw companies also pull back on their hiring. Softening demand conditions are also becoming more widely reported, curbing pricing power. Although tariffs were again cited as a driver of higher input costs across both manufacturing and services, the number of companies able to hike selling prices to pass these costs on to customers has fallen, hinting at squeezed margins but boding well for inflation to moderate.”

Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.

For more on this, read: What businesses do > what businesses say 🙊

🇺🇸 Most U.S. states are still growing. From the Philly Fed’s August State Coincident Indexes report: “Over the past three months, the indexes increased in 44 states, decreased in five states, and remained stable in one, for a three-month diffusion index of 78. Additionally, in the past month, the indexes increased in 37 states, decreased in six states, and remained stable in seven, for a one-month diffusion index of 62.”

📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 3.9% rate in Q3.

For more on GDP and the economy, read: 9 once-hot economic charts that cooled 📉 and We’re at an economic tipping point ⚖️

🚨 The Trump administration’s pursuit of tariffs is disrupting global trade, with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get more clarity, here’s where things stand:

Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, although cooling, also remains positive, and the Federal Reserve — having resolved the inflation crisis — shifted its focus toward supporting the labor market.

But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings and core capex orders have faded. It has become harder to argue that growth is destiny.

Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.

Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.

A version of this post first appeared on TKer.co