Many investors continue to view today’s market through an outdated lens—one that assumes high valuations automatically signal excessive risk or lower future returns. But markets evolve. What was once considered a warning sign may now reflect a new set of structural realities.

Today’s elevated price-to-earnings (P/E) multiples aren’t simply symptoms of irrational exuberance or market bubbles. Rather, they signal a deeper, lasting shift in how markets function and how capital is allocated. Sitting on the sidelines in hopes of a return to normal valuations could mean missing out on long-term wealth preservation and growth.

Market cycles come and go, but short-term discomfort is often the cost of long-term reward.

Understanding the New Market Multiples Landscape

P/E multiples have been trending upward for decades. This is not a short-term anomaly or bubble—it’s a secular shift, visible across data sets that span 20, 50, or even 100+ years.

Take the S&P 500, for example. The longer the time horizon we examine, the lower the average historical P/E becomes, revealing a structural trend toward higher valuations over time. Figure 1 illustrates this clearly over the past 20 years, with P/E ratios gradually moving higher.

Figure 1

Even the Shiller CAPE ratio, which smooths out earnings over a 10-year period to adjust for cyclical effects, has been trending higher. As opposed to a current or forward-looking P/E ratio, CAPE ratio takes into consideration a consistent earnings picture to remove possible short term outlier earnings. In other words, it removes the noise to look at valuations with how consistent earnings have been over multiple cycles. On top of that, the idea that the next decade will mirror the last is constantly challenged by innovation.

Long-term trends in P/E ratios show a reversion to higher multiples at market bottoms and an overall upward trajectory, reflecting a growing premium investors are willing to pay for earnings. These ratios do not necessarily work on an absolute basis such as interest rates, where reversion to the mean is a mathematical certainty.

In short, markets are repricing what future earnings are worth—and that repricing is grounded in data.

Why P/E Ratios Are Higher: Structural Market Drivers

Several powerful, interrelated forces help explain today’s elevated market valuations.

Lower Interest Rates and Accommodative Monetary Policy

As Figures 2 and 3 show, the Federal Funds Rate has been on a long-term downward trend, while the Fed's balance sheet has expanded significantly. This not only reduces the short-term cost of borrowing but also lowers yields in other parts or duration of the fixed income markets, leaving fewer compelling alternatives to equities.

Lower rates mean:

• Higher corporate profitability due to cheaper financing
• Increased equity demand due to unattractive yields elsewhere
• Resulting upward pressure on prices expands P/E multiples

Figure 2

Figure 3

Supply and Demand Dynamics

Capital continues to flow steadily into equity markets through institutional and retirement channels. Defined contribution plans inject over $1 trillion annually into the market. This sustained demand creates a support level under valuations, structurally reinforcing higher multiples. These flows into 401(k)s are automated, which means buyers show up every two weeks regardless of the headlines or market environment. In addition to this, short-term rebalancing or de-risking based on headlines is essentially non-existent. Both factors lead to larger support for the market’s supply-demand balance.

Company-Level Drivers of Higher P/E Multiples

Higher Profit Margins and Operating Efficiency

Many modern companies operate more efficiently than their historical counterparts. As Figures 4 and 5 illustrate, profit margins have consistently expanded, and earnings have become less volatile.

Figure 4

Figure 5

Multiline, Scalable Business Models

Unlike traditional companies, such as industrials or railroads, today’s dominant companies—particularly in tech — operate diversified, multiline business models under a single corporate umbrella. This reduces revenue concentration risk and boosts resilience.

Think of the top seven to 10 companies in the S&P 500. Together, they effectively run what used to be 100 to 140 separate businesses. Their ecosystems create economies of scale, cross-platform synergies, and durable moats that justify higher valuations.

Innovation and Strategic Reinvestment

These companies reinvest aggressively—not just to grow, but to defend their competitive positions. Many run internal incubators, acquire emerging threats, and take strategic stakes in adjacent sectors. They’re not just big; they’re agile.

This level of reinvestment is key to long-term growth and underpins the argument that today’s high valuations reflect not just current earnings, but expectations of sustained leadership.

Figure 6

Figure 7

Shifting Investor Preferences

Investor behavior has evolved:

• Capital appreciation is now more tax-efficient and preferred by a larger pool of investors
• Dividend-paying stocks are often viewed as stagnant and bond-like, with limited growth potential
• Investors and corporations have become more tax-efficient, capital gains are taxed lower than ordinary income and share buybacks are more tax-efficient than dividends, all of which can make companies more attractive to a broader investor set without paying out dividends
• Increasing emphasis on free cash flow retention to fund innovation, expansion, and shareholder value rather than payouts
• The rise of AI, automation, and operational efficiency will likely continue to drive earnings growth and justify premium multiples

In short, today’s investors are willing to pay up for growth, especially if that growth is scalable and cash generative.

Key Takeaways for Investors

Elevated valuations aren’t inherently a sign to exit the market. They’re often the reflection of evolving fundamentals and long-term macro trends.

In this changing market, investors should consider that:

• Higher PE multiples reflect structural change, not just frothiness
• Today’s market dynamics support elevated valuations
• Market timing based on outdated valuation thinking can lead to missed returns and compromised outcomes.

Trying to time the market based on valuation metrics that no longer tell the full story could be a costly mistake.

We encourage investors to stick to long-term plans despite short-term noise.

Figure 8

We’re Here to Help

To learn more or for help revisiting your portfolio strategy with a forward-looking lens, contact your Moss Adams Wealth Advisors professional.

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