No. of Recommendations: 14
I'm not sure I quite follow this as an optimistic view. As both articles are paywalled, I read only the summaries, but bear with me.
Starting from the basics underpinning the whole idea of CAPE analysis:
* The value of any set of equities ultimately derives solely from their aggregate net profit making ability, within rounding error.
* The S&P 500 is such a large fraction of the US economy that neither its profits nor value can grow any faster than the US economy over long time periods, which is a relatively steady long term trajectory once the business cycle is smoothed out. (profits from imports and exports matter, but they and their changes mostly cancel out well enough to ignore them)
* Taken together, this means that the likely aggregate profits of a broad enough set of equities can be extrapolated with sufficient accuracy to be useful, if not precisely, simply by doing the same sort of business cycle smoothing.
* If you know what future aggregate profits are likely to be (roughly), you have an idea of what would be a "normal" price to pay for that future stream by comparing the pricing to history. Future pricing may not be the same as the past norms, but you have to start somewhere.
If the set of stocks you're considering is still broad enough to be strongly representative of the corporate sector as a whole (a prerequisite for any CAPE discussion to have any meaning at all), and the new entrants to your sample have lower profitability than the ones leaving the index, it seems to me that this just means that the economy is less profitable than it used to be, not that a given dollar of upcoming profit is worth more than it was before.
Jim
