Relative equity valuations – mind the gap

One reason to think that the relentless outperformance of the US stock market since the Global Financial Crisis (GFC) will not continue for another decade is its valuation, which has become comparatively stretched over the past year. Admittedly, valuations have not tended to be useful for forecasting the returns from equities over short horizons. But they have had significant predictive power over longer periods, like ten years. This will probably remain the case, notwithstanding a secular drop in real interest rates.