![\"\"](\"https:\/\/www.newsbeep.com\/au\/wp-content\/uploads\/2025\/08\/price-earnings-ratio-using-earnings-scaled.png\")
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Can valuations remain this high or move higher? Absolutely. It wouldn\u2019t surprise me if that happened. Valuations\u00a0should be higher because tech stocks now dominate the market.<\/p>\n
But there are limits. Even with higher margins, corporate profits and sales are still tied to economic growth and consumer spending.<\/p>\n
The economy is already enormous so it\u2019s unlikely we experience the same growth levels we saw in the past.<\/p>\n
Kleiber\u2019s Law is the idea that larger animals are more energy efficient than smaller animals. Geoffrey West wrote about this idea in his book Scale<\/a>:<\/p>\n If an animal is twice the size of another (whether 10 lbs. vs. 5 lbs. or 1,000 lbs. vs. 500 lbs.) we might naively expect metabolic rate to be twice as large, reflecting classic linear thinking. The scaling law, however, is nonlinear and says that metabolic rates don\u2019t double but, in fact, increase by only about 75 percent, representing a whopping 25 percent savings with every doubling of size.<\/p>\n Economies of scale have limits. West further explains:<\/p>\n We just saw that a cat that is 100 times heavier than a mouse requires only about 32 times as much energy to sustain it even though it has approximately 100 times as many cells\u2013 a classic example of an economy of scale resulting from the essential nonlinear nature of Kleiber\u2019s law.<\/p>\n The larger the organism the less energy has to be produced per cell per second to sustain a gram of tissue. Your cells work less hard than your dog\u2019s, but your horse\u2019s work even less hard. Elephants are roughly 10,000 times heavier than rats but their metabolic rates are only 1,000 times larger, despite having roughly 10,000 times as many cells to support.<\/p>\n Elephants are more efficient than mice but they don\u2019t grow to the size of a cruise ship.<\/p>\n Exponential returns for a ~$50 trillion stock market would eventually consume the entire economy so there are limits to the growth rates.<\/p>\n This is also a bull market question. No one asks this kind of question during a nasty bear market. That\u2019s how sentiment works.<\/p>\n This got me thinking about the things people say or think during bull and bear markets:<\/p>\n Bull markets: It\u2019s too early to sell and too late to buy.<\/p>\n Bear markets: It\u2019s too early to buy and too late to sell.<\/p>\n Bull markets:\u00a0Am I a genius?<\/p>\n Bear markets:\u00a0Am I an idiot?<\/p>\n Bull markets: Why do I hold any bonds or cash?<\/p>\n Bear markets:\u00a0Why don\u2019t I own more bonds and cash?<\/p>\n Bull markets:\u00a0I\u2019ll rebalance later. Just a little higher I swear.<\/p>\n Bear markets:\u00a0I\u2019ll just wait until the dust settles.<\/p>\n Bull markets: Investing is easy!<\/p>\n Bear markets: Why do I do this to myself?<\/p>\n Bull markets:\u00a0Long live buy and hold!<\/p>\n Bear markets: Buy and hold is dead!<\/p>\n Bull markets: Diversification is for losers.<\/p>\n Bear markets:\u00a0I should\u2019ve hedged more.<\/p>\n Bull markets:\u00a0Why don\u2019t I own that?!<\/p>\n Bear markets:\u00a0Thank God I don\u2019t own that.<\/p>\n Bull markets:\u00a0Cautiously optimistic.<\/p>\n Bear markets:\u00a0Recklessly pessimistic.<\/p>\n Bull markets:\u00a0That guy who\u2019s been calling for a crash forever is always wrong.<\/p>\n Bear markets:\u00a0That guy who\u2019s always calling for a crash is brilliant. He saw it coming.<\/p>\n Bull markets:\u00a0Quoting Warren Buffett.<\/p>\n Bear markets:\u00a0Quoting Mike Tyson.<\/p>\n Bull markets: Someone is getting richer than me.<\/p>\n Bear markets:\u00a0No one is getting rich.<\/p>\n Bull markets:\u00a0Staring at charts all day in hopes they keep going up.<\/p>\n Bear markets:\u00a0Staring at charts all day in hopes they stop going down.<\/p>\n Bull markets: This is going to last forever.<\/p>\n Bear markets:\u00a0This will never end.<\/p>\n Michael and I discussed bull market behavior and much more on this week\u2019s Animal Spirits video:<\/p>\n \ufeff<\/p>\n Subscribe to The Compound<\/a> so you never miss an episode.<\/p>\n