Your statements are factually wrong.CAPE is simply a way of measuring valuations.Sure, if price went way up for no reason (because everything else stayed equal, including earnings), then yes, the stock market value would go up, because it's based on price. That's just a tautology. "Hey, if price goes up, then the stock market will be worth more". Well, yes.Valuation multiples are only part of the story. There was also a real estate crisis and other factors that reduced earnings. But all other things being equal, a lift of CAPE back to the mean of the last 5-10 years would lift the stock market index by about 50% alone.
OR... earnings could rise, and price could rise because earnings rose, and CAPE could stay EXACTLY the same, and the stock market could STILL go up 50%.
CAPE doesn't drive anything. It's just a measurement. Price can change from a lot of variables, but a big one is how people see the future.
Right now, people see China's future earnings as low or uncertain, so the price they are willing to pay is low.
That could absolutely change, and price could go up as people expect China's earnings to start rising.
But nothing is certain just because CAPE is below the median. There is no automatic "reversion to the mean". People think China's prospects aren't good right now. There's no law of nature that says every 10-20 years, people's view on China will change from good to bad or bad to good, and reversion to the mean has to happen.
If China continues to do poorly economically, stock prices will remain down.
They do drive returns. The higher the valuation, the less we can expect to be compensated for taking what the market seems as less risky.
This is simply how markets work, China is seen as far more risky right now than it was in 2007.
Valuations (CAPE, PE, PB, PCF, etc.) incorporate information about the distribution of possible earnings growth and an associated discount rate (i.e. return rate). High expected earnings growth leads to high valuations, as does a low expected rate of return (as you stated). As an example, consider comparing valuations of different sectors, say, technology versus energy or financial sector. Since they have and have had different earnings growth rates even for a fixed discount rate they would have different valuations.
The same holds true across differing geographies. Each country has a unique composition of public equity distributed across sectors. Hence, directly comparing valuations between say US and UK or Japan or China or India is not meaningful.
Before you argue that earnings growth is equal in various regions of the globe, this statement is also wrong. Checking Vanguard the Return on equity for US (VOO): 24.6, Developed Ex-US (VEA): 11.4, and Emerging Markets (VWO): 14.7. Return on equity is most closely correlated with earnings growth (available on Vanguard site), and as expected we pay more (higher valuations) for higher return on equity.
I am sure that you can find gurus that provide you with confirmation bias towards your preconceived beliefs. The best thing to do is recognize it is just that: confirmation bias. You likely don't have any (correct) insights that are not already priced into the market.
Statistics: Posted by BenS — Thu Aug 22, 2024 6:20 pm — Replies 6733 — Views 1654717