A recession that costs 2% of GDP can drop the stock market 40%. That doesn't make mathematical sense, but it's been happening all through the history of equity

A recession that costs 2% of GDP can drop the stock market 40%. That doesn't make mathematical sense, but it's been happening all through the history of equity markets because there isn't a strong mechanism to fight an irrational change in sentiment. If you think Intel is overvalued compared to AMD, you can short Intel, buy AMD, and make a bundle of money if you are right, so there is a mechanism to keep relative prices in line. If you think the 2020 market is overvalued compared to the 2012 stock market though, you can't move money back in time. Valuation doesn't tell you if/when a crash is gonna happen, it just gives a vague sense that returns will be lower over the next 10-20 years. A small positive return beats nothing, so a rational actor that knows the market is overvalued will stay invested. Hence, there isn't really any reason to believe market valuations are so rational. I tend to think the market is overvalued right now, but I'm buying stocks anyway, because I'm saving money and don't want to stuff it under my mattress.