What Is The Stock Market Discounting?

The stock market is discounting the ongoing resilience of the economy and corporate earnings. It is discounting that the odds of a recession over the rest of the Roaring 2020s are low. The longer the economy is expected to grow without a recession, the more sustainable high valuation multiples can be, since earnings growth can be expected to justify those valuations (chart).

High valuations don't cause bear markets. Instead, recessions cause bear markets by depressing both earnings and valuation multiples. Corrections occur when widely feared recessions cause valuation multiples to fall. However, those multiples quickly rebound when the expected recession doesn't happen, allowing earnings to continue growing.