Deep Store

A high price-to-earnings ratio looks expensive — until you remember the underlying earnings might be growing fast. Paying 30× earnings for a business doubling its profits in five years is very different from paying 30× earnings for one growing 2% a year. One is paying for real growth; the other is overpaying for nothing.

Growth-adjusted valuation asks the second question after the first: the price looks high vs. history, but is it still high relative to how fast earnings are actually growing? Whether you trust the adjustment depends on whether you think today's growth rate will persist or eventually revert.

Equities and bonds compete for your money. If a 10-year Treasury pays 5%, you'd want stocks to offer noticeably more — because stocks are riskier. So the same valuation level means very different things at 0% bond yields vs. 5% bond yields.

Rate-adjusted valuation asks: given today's bond yield, are equities still attractive on a relative basis? When rates are low, even "expensive" stocks can be the better deal. When rates rise, that support fades. Whether you trust the adjustment depends on whether you think today's rate environment will persist or revert.