Valuation has long been central to how we assess the stock market. Whether through price-to-earnings (P/E) ratios, the CAPE ratio, or price-to-sales metrics, investors have relied on historical averages to decide when markets are cheap — and when they’re dangerously expensive.
And by almost any traditional measure, global markets — especially the U.S. — look expensive today.
The S&P 500 trades well above its long-term average forward P/E. Corporate profit margins remain near record highs. And even after several rate hikes, interest rates are still low by historical standards. This combination has led many to warn of an inevitable mean reversion in valuations — that it’s only a matter of time before things return to “normal.”
But what if the benchmarks we’re using are no longer fixed?
I was listening to a podcast interview with legendary value investor Jeremy Grantham — co-founder of GMO and a long-time valuation skeptic. They were speaking about todays market valuations and he was reflecting on a newsletter he wrote in 2017 where he said –
“I couldn’t find anything that wasn’t different.”
Specifically, he was explaining that the world of had shifted — structurally — over the past two decades. In that 2017 letter, Grantham pointed out that:
- Price-to-earnings ratios were averaging 60% higher than their historical norms
- Corporate profit margins were 40% higher
- Interest rates had steadily declined to historically low levels
- Debt levels had surged outside of wartime precedent
These weren’t just short-term anomalies. In his view, they were the result of deeper forces: the rise of capital-light businesses, globalization, weak labour bargaining power, and a low-inflation environment — all of which structurally supported higher valuations.
What was so interesting was Granthams said that if he had stuck strictly to valuation rules from the 1980s or 1990s — expecting a reversion to long-term averages — his career might not have survived.
That’s a fascinating admission from someone who built a reputation around valuation discipline or investing only when markets were cheap
What would it take for valuations to revert?
Grantham’s point was not that reversion to the mean is impossible — but that it would require more than just a correction in share prices. For valuation ratios like P/E to fall meaningfully back to their historical averages, we’d likely need to see a simultaneous reversal in the factors that have supported them:
- Profit margins would need to shrink meaningfully, perhaps due to increased competition, rising labour costs, or regulatory changes.
- Return on equity would need to fall, particularly for dominant tech companies that currently generate massive earnings with relatively little capital investment.
- Inflation would need to return in a persistent way, which would typically lead to lower valuation multiples.
In other words, a reversion in valuations likely requires a broader structural shift — not just in prices, but in how businesses operate and what investors are willing to pay for their earnings.
Why this time may be different
There are legitimate structural reasons for why today’s valuations may be higher than historical norms:
- Tech dominance: The largest companies today — Apple, Microsoft, Alphabet — are high-margin, capital-light businesses that require little incremental investment to scale.
- Intangible assets: As I discussed in The Rise of the Intangibles, intellectual property, software, data, and network effects now dominate corporate balance sheets — and these assets don’t behave like traditional plant and machinery.
- Global capital and low inflation: Persistent disinflation and global capital flows have created a higher tolerance for elevated P/E ratios, especially when bonds offer little yield competition.
Put simply, the rules have not changed entirely — but the landscape has shifted. If we continue applying valuation models based on the 1970s, 80s, or 90s, we may misread today’s market.
So what do we do with this?
Grantham’s evolution is a useful reminder: history matters — but so does context.
Valuations are still an essential part of the investment toolkit. But if we cling too tightly to outdated benchmarks, we risk missing how the market is evolving.
Rather than treat valuation ratios as fixed laws, it may be more appropriate to see them as moving targets — shaped by broader forces like technology, demographics, and interest rates.
In short: we still need discipline and scepticism. But we also need to stay open-minded. Sometimes, “this time is different” isn’t a naive claim — it’s an observation that the world, and the markets, have changed.
