Valuations Might Not Actually Matter

Markets feel expensive. That observation comes up fast, and often ends the discussion. Award-winning finance writer Sam Ro thinks that is a mistake.

In a recent conversation on Excess Returns, Ro argued that valuations matter, but not as forecasts. They describe the price investors pay today for future cash flows. They set starting conditions, not short-term direction.

History shows why this distinction matters. Expensive markets can stay expensive for years. Cheap markets can stay cheap or get cheaper. Using valuations to time the next move has repeatedly disappointed investors.

Calling the market expensive only answers half the question. The more important issue is why prices sit where they do.

Ro pointed to profit margins. Corporate profitability remains well above historical norms, which mechanically supports higher valuations. Efficiency gains, stronger balance sheets, and technology-driven scale all help explain why earnings have stayed resilient.

That explanation comes with a caveat. High margins invite competition. Pricing pressure, regulation, and innovation eventually push returns lower. Valuations already assume a favorable outcome on margin durability, whether that proves true or not.

Ro was blunt about bubbles, especially in AI. He expects excess. He does not pretend to know when it ends.

History offers a warning. Identifying a bubble does not tell investors when to exit or when to re-enter. Many who tried to time past booms underperformed simply by staying invested.

The deeper lesson runs across cycles. Capital booms reward users more often than builders. Markets rotate leaders without breaking. The biggest risk is false precision. Prices already embed optimism. Acting on certainty is usually where things go wrong.