Earnings Cycle vs Valuation Cycle Divergence

Asset pricing depends on two independent dimensions: (1) current earnings power, and (2) the valuation multiple the market assigns per unit of earnings. While these typically move in tandem, they diverge at cyclical turning points—earnings may surge while valuations compress, or earnings may decline while valuations expand. This divergence reflects differing market expectations about the cycle's position and creates opportunities for excess returns or losses.

Articles on this principle

• The Korean Stock Market Paradox: Soaring Profits Yet Valuations Hit Bottom

  Korean stock index up 80% annually, memory chip giants' profits exploding, yet P/E ratios have fallen to financial crisis levels—is the market saying "this is a good business" or "the boom is ending"?