Do stock market valuations actually revert to their historical average, or is that just a story bears tell themselves after a decade of being wrong? Goldman Sachs recently argued the former is a myth, stating plainly that “we should dispel an oft-repeated myth that equity valuations are mean-reverting.” Coming from one of Wall Street’s most influential research desks, that claim is worth examining closely, and I think it’s missing something important.
Goldman’s case, and where it holds up
Goldman’s argument is that valuations have upper and lower bounds, they can’t go to infinity or below zero, but bounded doesn’t mean the series is stationary or reverts to a single long-term mean. Mathematically, that’s a fair point. A number averaging X over 150 years doesn’t automatically snap back to X just because it’s historically done so. Where the analysis falls short is in what it uses as its baseline.
The mean itself has moved
Look at CAPE (cyclically adjusted price-to-earnings) ratios across different periods and a shift becomes obvious: the median from 1871 to today sits around 16.4, but the median from 1871 to 1980 was closer to 15, while the median from 1980 to today runs closer to 23. That’s a substantial upward shift, and it isn’t purely a story about accounting changes or share buybacks. It lines up with two real structural changes since 1980: slower underlying economic growth combined with disinflation, and a large increase in leverage throughout the economy. Slower growth pushes companies toward cost-cutting and financial engineering to protect margins rather than genuine revenue growth, and since the 2008 financial crisis much of reported corporate “profitability” has come from exactly that. The stock market has returned roughly 200% since its 2007 peak, well ahead of GDP growth and corporate revenue growth over the same period, a gap between prices and the underlying economy that’s worth paying attention to.
A better baseline than a flat historical average
Comparing today’s valuation to a single long-term average is a bit like judging tides by the average water level over the past century, it misses the underlying trend the average sits on top of. A more useful comparison looks at valuations relative to their long-term exponential growth trend, which accounts for economic growth, earnings growth, and inflation over time. Measured that way, valuations do appear to revert, and the biggest deviations from that trend line have historically preceded major corrections, including 1929 and the 2000 dot-com peak. By this measure, current valuations sit near the second-highest level on record, though only around the fourth-highest deviation from the long-term growth trend, which suggests a reversion is plausible without necessarily implying a return to historically low multiples.
Short-term noise versus long-term fundamentals
Over a year or less, fundamentals barely matter. Price action mostly reflects sentiment, news cycles, and short-term positioning. Over ten or twenty years, fundamentals are close to the only thing that matters. Based on current CAPE levels, historical relationships would suggest muted forward real returns over the next decade or two, a meaningfully different environment than the returns investors have grown used to over the past ten years. That’s a historical relationship, not a guarantee about what will actually happen.
What this means for planning, not predicting
Nobody can time this with precision, and markets can stay elevated longer than most people expect. But planning around lower expected returns than the last decade, rather than assuming the recent past simply continues, is a reasonable, conservative starting point for long-term goals like retirement. Diversifying beyond U.S. large-cap stocks, into international markets, value strategies, or other asset classes, may offer better risk-adjusted outcomes in a lower-growth environment, though that depends on your specific goals and risk tolerance. And it’s worth remembering that research from any firm with a business interest in market optimism, Goldman Sachs included, deserves to be weighed alongside other sources rather than taken as the final word. Valuation matters for long-term outcomes even when the exact mechanism doesn’t match a tidy statistical model, and treating it as irrelevant has been costly for investors before.
Educational only, not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
