Is average normal for US equities?

The bears’ argument that the valuation of the US stock market is unsustainably high is typically made by comparing the current level of Shiller’scyclically-adjusted price/earnings ratio (CAPE) for the S&P Composite, which is around 26, with its average since 1881, which is only about 14. However, the bears’ argument assumes that this average is a “normal” level to which the CAPE ought to revert. This assumption is wrong if, as we believe, there has been a decline in the equilibrium level of investors’ required real return from US equities, for which the cyclically adjusted earnings yield (CAEY) – that is, the inverse of the CAPE – is an approximation.