Valuations don’t appear unsustainably high

There is a widely-held view that the prices of many financial assets are bound to come crashing down sooner or later, because their valuations have risen far above the long-run averages to which they must inevitably revert. We think that this is bunkum, because the equilibrium valuations of financial assets have risen to levels that are much higher than their long-run averages. Of course, valuations could still fall below their new equilibrium levels. But they don’t need to plummet in the way that the bears claim.