On just about every valuation metric, U.S. stock indexes [[IVV]] [[SPY]] are trading at or above historical extremes. And yet, while the U.S. equity market is overextended, the U.S. economy is not. This distinction bears considerably on the amount of risk that investors should be willing to take. In our opinion, equating market-based froth with economic excess is ill-considered and the seminal error in the argument to bet against the U.S. and its equity market.
Current valuations do suggest that long-term future U.S. broad market returns will be subpar. But the claim that a bear market is imminent because markets are expensive-an argument made repeatedly by market bears-confuses cause and effect. Expensive valuations may precede bear markets, but market declines are generally caused by larger economic effects. And today, economic data suggests that a recession isn't in the cards for at least another 18 to 24 months.