S&P 500 circa 1650: Too optimistic based on P/BV?

This article posits that at the current price to book value of the S&P 500 (INDEXSP:.INX), Mr. Market is taking an optimistic view based on fundamentals. We support our thesis by reverse engineering the P/BV for the S&P 500 (INDEXSP:.INX) based on current and historical values for the market ROE, as well as other market fundamentals.

In 1977, Warren Buffett presented his “How inflation swindles the equity investor” article in Fortune  that presented data regarding the stickiness of the return on equity at 12 % for the market during the post war period through the mid 1970’s. Mr. Buffett indicated that...