I am going to take a look at a common valuation measure the P/E (see wiki).

The first question is what is a fair (mean) business price for future earnings only?

This is not so hard to answer as most people would agree on a P/E of about 14 equivalent to a yield of 7.14% pa.

However, when it comes to the stock market valuations, it gets very hard as movement and expectations drive the equation. Individual stock valuations can be extreme.

Cautious and wounded punters are prepared to pay only about P/E 7 but at times of “Irrational Exuberance” any number north of P/E 21 will do.

The chart above is the Nikkei 225 (source Yahoo).

Since the 1990s Japanese stock boom valuations have compressed for some 19 years!

In the past stock valuations seemed to ‘Expand and Compress’ in long waves and there are studies based on this observation that make dire predictions about the future of the USA S&P 500.

S&P 500 valuations peaked with the Tech Boom in the year 2000; a modest 9 years ago!

In November 2008 and March 2009 world stock selling climaxed and markets found a low point.

This was despite falling earnings numbers, and you know what that means… ‘Air is Back’.

Expanding valuations have in June triggered positive price momentum indicators that we reproduce here (thanks to The UK Investors Chronicle and US Forbes Publications).

Now will we see single digit P/Es for the S&P 500 in the next 4 to 8 years as some predict?

Or will those who think so be left wondering.

This is the stuff that stock markets are made of.