Excess Returns Podcast: "The Case for Permanently Higher Market Valuations"

Guest: Jim Paulsen
Date: November 2, 2025
Hosts: Jack Forehand, Justin Carbonneau, Matt Zeigler

Episode Overview

In this special joint launch episode of the "Jim Paulsen Show" (included on the Excess Returns feed), the hosts dive deep into the pressing question: Are higher market valuations here to stay, and if so, why? Featuring renowned strategist Jim Paulsen, the episode covers shifting valuation ranges, the historical roots and drivers of higher valuations, the relevance (and limits) of traditional metrics, and what this means for investors in today’s market environment. The conversation is highly data-driven, utilizing a series of illustrative charts from Paulsen’s “Pulse and Perspectives” Substack to highlight trends and offer context.

Key Discussion Points & Insights

1. Current Market Backdrop and Key Drivers of Sentiment

• Timestamp: 03:29–11:32
• Jim Paulsen expresses that widespread fear and pessimism remain dominant, despite market highs.
• Low consumer confidence, a fearful Fed (evidenced by rate cuts), gold at record highs, and high money market fund balances all signal persistent investor anxiety.
  • “Consumer confidence is still at an all time record low or within an eyelash of that... even though the market’s at a record high.” (Paulsen, 05:05)
• Media and financial pundits are saturated with dire predictions, from comparisons to the 1929 crash to worries echoing the dot-com era.
• Paulsen notes cyclical S&P sectors have notably underperformed since the government shutdown—an indicator of perceived economic weakness.
• However, he sees hopeful signs: broadening participation beyond mega-cap tech, improving breadth, and increased money supply signal possible health beneath the surface.
  • “I do see some broadening going on in the stock market. Micros and smalls, IPOs, low quality doing better... International stocks doing a lot better.” (Paulsen, 10:12)

2. How Should Investors Use Market Valuation Data?

• Timestamp: 11:32–16:30
• Paulsen reflects on his evolution from strict value investing to a broader assessment.
  • “I kind of divorced myself from [value investing] because… valuations kind of going off the rails from any kind of range or normalcy… It’s led a lot of people to make bad decisions.” (Paulsen, 13:14)
• Argues valuation is not a timing tool; sentiment and macro environment deserve more focus.
• Warns that overreliance on “mean reversion” has cost investors dearly during this period of persistent high valuations.

3. Historical Context: A New Valuation Paradigm

• Timestamp: 16:30–29:31

a. Shiller CAPE and Changing Valuation Ranges

• The “old” CAPE range (7–21) held nearly steady from 1870–1994; since 1994, markets have spent almost all time above the prior 90th percentile.
  • “For about six months since 1994, we’ve been at the 90th percentile or higher of the previous hundred years of valuation.” (Paulsen, 18:22)
• This upshift is not limited to tech or large caps—most percentiles now sit at higher levels across the entire equity universe.

b. Broad-Based Phenomenon

• Data from the Kenneth R. French database confirms that roughly 70% of stocks trade at higher historical multiples; only the cheapest deciles remain “low.”

c. Trailing P/E and ‘Rolling Means’

• Even the median S&P 500 trailing P/E (traditionally ~14) has drifted steadily toward 20 in recent decades, raising valid questions about which historical metric to believe.

4. Why Are Market Valuations Permanently Higher?

• Timestamp: 30:05–45:12

a. Fewer Recessions and More Stable Earnings

• The frequency of U.S. recessions has dropped from once every 2–3 years to only 10% of the time in the last 25 years.
  • “We had a one month recession in the last 15 years back to 2010… That’s a huge reduction in risk and a huge increase in the amount you can afford to pay for it.” (Paulsen, 31:17)
• Less economic volatility justifies paying more for a more reliable stream of corporate earnings.

b. Reasons for Fewer Recessions

• Three main drivers identified:
  1. The policy regime shift: Federal Reserve/fiscal policy actively moderating the cycle post-WWII.
  2. Innovation cycles create growth less tied to classic economic/policy forces.
  3. Conservative balance sheets in households/corporations since the GFC, reducing vulnerabilities.

c. Other Contributors to Higher Valuations

• Massive increase in household/corporate cash as % of GDP creates liquidity that flows into assets.
  • “Just having greater liquid markets, I think, leads to higher valuations or less risk.” (Paulsen, 39:52)
• Real corporate profit per employee has tripled since the early 1990s (driven by tech, productivity, AI).
  • “Profit productivity in real terms has tripled… Why wouldn’t you expect that the valuation of the stock market would go up a lot too?” (Paulsen, 41:21)
• Adjusting CAPE for profit productivity levels compresses much of the prior outlier results—suggesting current valuations may not be as stretched as simple ratios imply.

5. Valuation Metrics: Limitations and Modern Nuance

• Timestamp: 45:24–53:09

a. Forward P/E: More Sentiment Than Value

• Pre-1990s, forward earnings barely existed; today, forward P/E is the norm, but Paulsen calls it a sentiment gauge as much as a value one.
  • “It’s essentially the same chart—bullishness goes into earnings if you will… It’s a sentiment measure.” (Paulsen, 47:08)

b. Current Valuations: Not Just About Tech

• Mega-cap tech’s trailing P/E is elevated (~36–37x), but the other nine S&P sectors show modest valuations.
• Mid-cap, small-cap, value, low volatility, and equal-weighted S&P 500 indices are not expensive by absolute standards.
  • “None of them… show much excessive valuation at all in this market.” (Paulsen, 52:10)
• The market is not wildly overvalued on an absolute basis outside the biggest, fastest-growing sectors.

6. Industry Breadth & What’s Still Cheaper

• Timestamp: 56:42–57:42
• Over 70% of S&P 500 industry groups are currently trading at below-average relative P/Es. There remains “quite a bit left over… that’s pretty cheap.”

7. Risk, Return, and the Policy Regime

• Timestamp: 58:12–63:19
• Paulsen introduces four risk-return “frontiers” based on combinations of fiscal and monetary policy (high/low).
• Indicates recent times have seen “high fiscal, low monetary” (the red boomerang), but with the start of renewed monetary stimulus, we might enter “high fiscal, high monetary” (the green), historically associated with significant asset returns.
  • “Going from a fiscal high, monetary low [regime] to both high could be a real boon in the last half of this bull [market].” (Paulsen, 61:19)

8. Reconciling Risk Premiums and Returns

• Timestamp: 63:19–65:50
• Justin poses: If stock market risk is lower (fewer recessions), shouldn’t risk premiums fall? Why have returns stayed high?
• Paulsen notes bond yields' secular decline (after 1980s bond bull) may alter historical return relationships, especially if bond yields slip further below 4%.

9. Final Takeaways: This Is Not Dot-Com 2.0

• Timestamp: 66:01–68:07
• Paulsen draws a stark contrast to 2000: today’s tech companies are much larger, more profitable, and a structural part of the economy—not speculative bets with no earnings.
  • “In retrospect, tech I think is at far less risk today of collapse than it was in 2000. And I think that’s a key thing you have to make a decision on. Do you think there’s collapse risk for new era? Or just underperformance risk? And I still think the latter.” (Paulsen, 67:20)

Notable Quotes & Memorable Moments

• “What we have had here is a broken scale of judging what’s high and low valuation.” (Paulsen, 17:29)
• “Something else is going on here. Something has changed the… range of valuation and I don’t… it's not likely to go back anytime soon.” (Paulsen, 17:56)
• “This isn’t just a phenomenon that’s occurred among the largest 10% of stocks… This is pretty broad-based.” (Paulsen, 21:33)
• “You can have values wherever they are. If sentiment gets too high, there’s risk… when I started, we had low vals for a decade or more, and I could tell you, we had bear markets from very low valuations.” (Paulsen, 14:57)

Key Timestamps for Major Segments

| Segment | Timestamp | |-----------------------------------------------|-------------------| | Current Macro & Sentiment Overview | 03:29–11:32 | | Valuation as an Investment Tool | 11:32–16:30 | | CAPE Charts & Shifting Averages | 17:05–29:31 | | Drivers of Permanently Higher Valuations | 30:05–45:12 | | Limits of Modern Valuation Metrics | 45:24–53:09 | | Valuation Breadth Across Industries | 56:46–57:42 | | Policy Regimes and Risk/Return Frontiers | 58:12–63:19 | | Reconciling Returns, Risk, Premiums | 63:19–65:50 | | Final Takeaways: 2020s vs Dot-Com Era | 66:01–68:07 |

Summary Table: Why Are Valuations “Permanently” Higher?

| Driver | Mechanism | Paulsen’s View | |--------------------------|--------------------------------------------|---------------------------------------| | Fewer recessions | More reliable profits, less risk | “I kind of doubt” recessions surge | | Innovation cycles | Secular revenue and profit growth | Innovation shields from old cycles | | More liquidity | Asset-rich households/corporates | “Flushing the entire economy…” | | Higher profit per employee| Tech boosts profit productivity | “Profit productivity… has tripled…” | | Changing policy regime | Fiscal/monetary support reduces downturns | “Federal Reserve acts as a backstop” |

Conclusion

This episode provides a lucid, data-heavy, and candid look at how and why U.S. market valuations appear structurally higher today, and why waiting for “mean reversion” might not be wise. Jim Paulsen explains that enduring forces—tech-driven productivity, lasting liquidity, resilient profits, less frequent recessions, and evolved policy—have created a “new normal” for equity multiples. Traditional valuation anchors may actually mislead, and sector/size nuances remain crucial.

Final note:
Investors should challenge rigid valuation dogmas, thoughtfully weigh sentiment and macro context, and remain open to structural shifts rather than anchoring exclusively on the past.