In the following chart, we look at the median price to earnings ratio (PE) to get a sense of current valuation. Are U.S. equities, in general, inexpensively priced or expensively priced? If we buy an inexpensively priced asset, there is greater future return potential. Stating the obvious, if we pay too much, our return potential is more limited. Not a problem if you have a 20-30 year time horizon and the ability to stay the course when turbulence hits (2002, 2008, etc.). It is a problem when a major correction occurs just prior to your retirement.
There are many ways to measure valuation. I favor median PE for it is a mathematical process based on ACTUAL earnings. History has shown that Wall Street analysts tend to over-estimate future earnings. The challenge for those who favor forward earnings estimates to calculate PE is that there is a long pattern of those estimates subsequently being revised lower. Thus, this is too much of a moving mark for me.