Abstract
Historically, high P/Es have led to low returns and low P/Es have led to high returns. So, with today's market at historically high P/Es, there is a real need for rescue. This discussion examines three possible ways in which the market might be saved from decline: high and sustained real earnings growth (which are highly unlikely), low interest rates (which help only in the short term), or investor acceptance of lower future rates of return. The last possibility boils down to a choice between low long-term returns forever and very low (crash-type) returns followed by more historically normal returns. The research presented here found some support that investors should accept a 6–7 percent nominal stock return, but evidence indicates that investors do not actually think they are facing such low returns.
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