Long Valuation Waves - The P/E Supercycle Revisited

by: William Trent, CFA

We have written about the P/E supercycle before and the long valuation waves that accompany it, and we will write about it again, if only to remind ourselves. Stock valuations run in cycles, and right now we are on a downward valuation cycle. Stocks may rise, but will do so at a slower rate than earnings.

Friday, SafeHaven posted a lengthy article on this subject if you are curious.

We have taken out their two charts and a key quote, showing how the P/E supercycle has affected valuations in past bull and bear markets:

PE # 1

According to the article:

Like great ocean waves, valuation waves run sequentially. After a valuation trough, like 1982, the main valuation wave starts sweeping into shore over the next 17 years or so and ultimately drives stock prices to very high levels relative to their earnings, the valuation crest like we saw in early 2000. But after this valuation crest passes, the valuation wave continues on and valuations relentlessly fall for 17 years or so down its backface until the next valuation trough. It is these receding valuation waves that create secular bear markets.

PE cycle # 2