Valuations not so crazy after all? Public markets keep breaking all-time-highs and some are hollering “bubble.” If you look at p/e ratios, you might also notice that investors are paying historically high prices for earnings. So, checkmate for the no-bubble bros, right? Not so fast. It’s true that multiples on earnings are historically high, but it’s also true that companies are historically profitable–and valuations have scaled accordingly. The higher the margins, the higher the p/e ratio. At ~14.5% margins, the S&P is more profitable than ever. And unlike the clear “bubbles” of Dotcom (orange) and Pandemania (dark green), current valuations are well within trend. Adjusting for margins, the current p/e is ~17.75%, which is about the same as it was from 2015-2018! The point here is that for all the histrionics, investors aren’t dumb. There’s a clear method to the madness, and it’s all about profitability. Fat margins and growing profits lead to high stock prices, and fat margins and growing profits is exactly what PublicCos keep doing. Now, reasonable minds can disagree about whether forward earnings estimates are correct (and there are of course many other things that affect stock prices), but taking them at face value, there is nothing bubbly at all about current valuations. Read more here: https://lnkd.in/gpENSDcW
Agreed it's always true that growth stocks have very high PEs because future earnings growth aren't reflected, it's also true that at every point before high growth in history, every all time high was not an indication of a ceiling. So these are the weak arguments for a bubble. The stronger question is layoffs, and the question of how AI will correct for large scale IP giveaway that it's enabling right now. Both of these are macroeconomic red flags. Perhaps Trump's domestication of manufacturing will kick next year, we don't know yet. Until we see private sector job growth, the economy will be facing headwinds, and AI ROI will be muted.
These articles are just what the market needs thank you
Valuation is roughly 'total future earnings', not 'margins' and while bigger margins are nice ... they're already built into 'earnings' ... so why would bigger margins justify significantly higher multiples?
Love this framing. The operator translation is simple: protect what creates margin—decision velocity, focus on core customers, and ruthless resource allocation. Multiples follow management discipline, not headlines.
But it is frothy around the edges. And a lot of inexperienced people are still trying to see AI through old lenses …all of which creates or leaves opportunity for the right people and teams
The fatter the margins, the stronger the business model, and the higher the valuation premium. That makes sense to me. But you also have to believe these fat margins are protected by real competitive moats. Clearly, big tech is driving the fatter margins, and so far, these business models have proven defensible.
a16z presents a compelling case for why valuations may not be excessive ... a sharp argument, but it deserves the same diligence we’d apply to a Series B term sheet in 2025. AI-driven productivity does improve margins, but is that margin delta sustainable beyond the first automation wave? Capital rotation patterns show that liquidity-driven multiples usually fade once IRRs normalize. Post-2021 data suggests diminishing returns between revenue growth and valuation elasticity. In short, we may be projecting structural permanence onto transient efficiency ... a classic valuation trap. Investors might not be irrational, but assumptions can be. Margin permanence remains the invisible variable in this equation.
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15hIt feels like we’re still using legacy instruments to measure a market that’s evolved beyond their original scope. The tools haven’t changed, but what they’re measuring has. Profitability, margins, and efficiency have all scaled with technology, yet the narratives around “bubbles” haven’t caught up. It's more a lagging or slightly misinformed indicator. At some point, the forward earnings debate starts to sound like arguing semantics while the playbook is being rewritten.