WHAT WE MEASURE
Valuation compares current market prices to fundamental measures of economic output and corporate earnings. When prices detach from the underlying reality of what businesses actually produce, a reversion toward fair value becomes increasingly likely. This category aggregates multiple metrics to create a robust picture of whether the market is cheap, fair, or dangerously expensive.
WHY IT MATTERS FOR BUBBLE DETECTION
High valuations are the single best long-term predictor of poor forward returns. Across 124 years of US market history, every major bubble has been preceded by extreme valuations: the 1929 crash, the dot-com collapse, and the 2022 correction all began from elevated starting points. Overvaluation does not tell you when the market will correct, but it tells you the risk/reward is skewed unfavorably.
Each metric is normalized against a 20-year rolling window and scored 0–100 (a score of 70 means more extreme than 70% of historical readings). The Valuation category combines multiple normalized metrics using equal weighting, then contributes 30% of the overall composite score.