"Expensive" is the new standard? Wall Street begins to embrace the "new normal" of stock market valuations.

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Just as market skeptics warn that stock market valuations have soared to dangerously high levels, a growing voice on Wall Street is asserting that it’s time to reassess how we define “expensive.”

More and more Wall Street analysts suggest that investors may need to let go of traditional notions of price-to-earnings ratios. Bank of America strategists expressed a similar view last week, arguing that today’s high valuations should be regarded as the “new normal,” rather than expecting them to revert to the mean of a “bygone era.” Analysts point out that the S&P 500’s valuation center has structurally shifted upward, supported by factors such as fewer U.S. recessions, a shift toward technology and services, and improved profit stability.

This echoes analysis by veteran Wall Street strategist Jim Paulsen. Paulsen’s analysis shows that the S&P 500’s valuation midpoint has persistently moved higher over the past few decades, which he believes undermines the pessimistic narrative that directly likens the current AI frenzy to the internet bubble of the late 1990s.

This shift raises two core questions: How should investors judge a continuously moving valuation target? And will it keep entering “uncharted territory” at a similar pace? This debate over the valuation paradigm is deeply shaping investor expectations for future market returns.

Structural Upward Shift in Valuation Center

Data shows that the valuation range of the U.S. stock market has experienced a significant leap this century. According to Jim Paulsen’s analysis, the S&P 500’s rolling average price-to-earnings ratio over the past 30 years has risen from about 14 times in the early 1990s to around 19.5 times today. Meanwhile, from 1900 to the mid-1990s—nearly a century—the ratio remained stable within a narrow range of 13.5 to 15.5 times.

Paulsen stated:

“There are some strange changes happening to valuation versus the past—in other words, there’s a continuous upward trend in the valuation range.”

Paulsen believes that the upward shift in valuation midpoint is not accidental, but is supported by multiple factors. He points out that the frequency of U.S. recessions has dropped significantly—from about a 42% probability pre-WWII to just about 10% in the past 30 years. Simultaneously, the U.S. economy has shifted from being industry-dominated to technology- and services-led, and the market itself now favors growth stocks capable of supporting higher valuations.

In addition, other structural changes have also played a role. The rise of electronic trading, along with greater participation by individual and international investors, has improved market liquidity. What Paulsen calls the “profit productivity” (real profit created per unit of employment) has seen a permanent uplift, providing an upward bias to valuations. Lastly, the ever-accelerating historical cycle of innovation has also contributed to higher valuations.

Constituent Changes Support High Valuation

Paulsen is not the only market observer who believes high valuations are justified. Bank of America strategists have recently echoed this premise. Savita Subramanian, head of U.S. equity and quantitative strategy at BofA, wrote in a report to clients on September 24, that the inherent characteristics of the current S&P 500 constituents provide support for the ever-rising valuation multiples.

Subramanian pointed out that compared to previous decades, the companies in today’s index now have lower financial leverage, lower profit volatility, higher efficiency, and more stable profit margins. She emphasized:

“The index has changed significantly compared to the ’80s, ’90s, and early 21st century. Perhaps we should anchor today’s valuation multiples as a new normal, rather than expect mean reversion to an era that’s long gone.”

“Re-Anchoring” Rather Than Unlimited Climb

However, not everyone believes that valuations will continue to climb indefinitely. Jonathan Golub, chief U.S. equity strategist at Seaport Research Partners, offered a more moderate view, arguing that the market isn’t in a state of “perpetual valuation drift upward” but is instead “re-anchoring at a higher level.”

Golub explained that the extremely low valuations of the 1970s and 1980s were partly due to the extremely high interest rates at the time, which raised capital costs and threatened the operational ability of companies. He believes that if borrowing costs were to rise significantly again in the future, valuation multiples could fall back to average levels seen decades ago. However, he added that he currently sees no such risk on the horizon.

Risk Warning and DisclaimerThe stock market carries risks; investments should be made with caution. This article does not constitute personal investment advice and does not take into account your individual investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are applicable to their individual circumstances. Investing accordingly is solely at your own risk. ```