Following this period of extraordinary monetary policy accommodation, Barclays Barry Knapp notes it stands to reason that, although there is some room for additional risk premium contraction (the aggregate measure for the S&P 500 remains above the long-term mean), the equity market on a stand-alone basis can hardly be considered cheap. In fact, looking across a broad range of balance sheet and income statement metrics over a period we would characterize as representative (albeit with a somewhat large dispersion of 1973-present), the equity market is above the long-term mean on every measure.
But it gets better. There is little doubt that liquidity will prove challenged in coming weeks but market participants appear to be far too relaxed about events as equity market risk measures are close to the low risk point of their post-crisis range. So expensive valuations and risk complacency - BTFATH?
Furthermore, as is clear from the chart below, intra-stock correlations tend to rise (systemically) during Fed easings - most notably in the latest period - and then fade notably as 'normalization' begins. The reason this is key is that it means fundamentals will become a stronger determinant of future price action...
in other words, earnings (not multiple expansion) will matter (and that is a worrisome sign).