With S&P 500 P/E at 28.95, its common to hear that the market is over valued. This is easily concluded by looking at the current PE ratio and comparing that to historical averages.
Let's briefly look at what this means from a return on your invested capital.
* P/E at 28.95 translates to a TTM yield of \~3.5%
* Next you need to account for earnings growth in the future. Let's assume earnings grow in line with GDP growth
* Average annual real GDP growth has been 2.5% on top of healthy inflation of 2%
* Thus, your expected annual return will be \~8% (2.5+2+3.5). This assumes that the long term GDP growth and inflation are in line with historical averages.
* Now the historical annual return of the S&P 500 is \~10%. Based on current valuations, in order to achieve the historical average annual return over a long period of time, nominal GDP (real growth or inflation) would need to increase 2% greater than historical averages.
* Alternatively, valuations would need to continue increasing consistently and sustainably which is highly unlikely, OR long term future annual returns of the S&P 500 will be less than historical returns
None of these things has ever happened sustainably over a long period of time, even through technology and industrial revolutions, which is why an overvalued market has real consequences in terms of expected returns, and why imo folks like Buffet are hoarding cash.