Do fundamentals still drive relative valuation in a euphoric market ?

The purpose of this paper is to investigate the relationship between the fundamentals of financial assets in the broad U.S. market and the relative valuation of these same assets over the last four years of stock market euphoria. At the end of this study, we find first that relative valuation multiples are overwhelmingly negatively related to their value in the previous quarter. The intuition behind this phenomenon is that overvalued (undervalued) relative valuation multiples are likely to face correction by the market and investors, thus decreasing (increasing) their relative value compared to the previous quarter. Second, we see that there seem to still have a few dynamic links between fundamentals and the relative valuation for the stock market indices, whereas the results for the individual stocks are way less conclusive in this respect. Nevertheless, in both cases, the relationship between the two dimensions seems to hold mostly for the short term. This is again especially the case for individual stocks where we find very little significant long-term relationship over the studied period.