The S&P 500’s P/E ratio just hit a 4-year high at 22.6x, but here’s why the market isn’t really screaming “overvalued.” The act of comparing today’s multiples to their 10-year averages is, in our view, conceptually flawed. It implicitly assumes the index’s earnings structure and risk profile haven’t changed over the years — but they clearly have, especially with how much the sector mix in the S&P has shifted over time. The one thing that best captures most of these changing effects is profit margins. It’s obviously not perfect in that regard, but it’s a pretty intuitive way to explain why large-cap valuations have drifted higher in recent years. That said, if you’re comparing today’s 22.6x multiple to the 10-year average, you’re also comparing it to a period when margins averaged about 12.25%. Right now, they’re closer to 14%. That context matters. 🧵 Thread