The blue bars in this graph are declining markets for the stock index. Goldman-Sachs made the chart, indicating to its clients that steady gains are no long part of the strategy. How did they know?
As the index PE approaches the one year rate, under low volatility, then risky stocks get priced higher. Not all of them can respond to rising rates equally. Hence the index measure become volatile and stocks revert to intrinsic value, generally chaotically down.
The market distribution of PE changes as the average rises. Suddenly for a small riser in yhe average there any many that miss the mark.
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