By Hamlin Lovell, NordicInvestor

Bears have been calling the top for years now but US equities keep on making new highs, but Norges Bank is increasing its allocation. Whether equities appear expensive or cheap depends on the definition, and varies greatly by regions, factors and sectors.

Countries

US equities are not on particularly high valuations in absolute terms: the PE ratio just above 20 is a bit above its long run average, but not at extreme levels:

US equities may even be considered cheap relative to bonds: in August 2019, the dividend yield on the S&P 500 index is slightly higher than the yield on ten-year Treasury bonds, for the first time since the great financial crisis in 2008. This is remarkable because income from bonds is fixed whereas dividends tend to grow over time.

US equities are deemed expensive when profits are cyclically adjusted, as below. The Shiller CAPE is around 1929 levels and was only higher in 2000 at the climax of the TMT boom.

The bearish argument is that the profit share of GNP is unusually high, partly due to US corporate tax cuts, and should at some stage mean revert. This could happen if US corporate tax rates go back up, which might occur if a Democratic President wins in 2020. Profits may also suffer if workers get a higher share of GNP, and this might happen if the US meaningfully restricts immigration. There are already si