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At some point, valuation matters.

It always has, and despite what the perma-bulls and market cheerleaders might suggest, it always will. Today's equity market is flashing warning signs that serious investors simply cannot ignore.

Let's examine the evidence that suggests U.S. stocks may be among the least attractive options for long-term investment accounts right now, and explore where patient capital might find better homes.

The Harsh Reality of Current Stock Valuations

The data doesn't mince words. Current market valuations are in rarefied air:

CAPE Ratio (33-35): This Cyclically Adjusted Price-to-Earnings ratio, developed by Nobel laureate Robert Shiller, averages earnings over 10 years to smooth out business cycles and has proven remarkably accurate in forecasting long-term returns. Current readings are in the 95th percentile historically, exceeded only during the 1920s and 1990s bubbles.

Excess CAPE Yield (-1.6%): Calculated by subtracting the 10-year Treasury yield from the inverse of the CAPE ratio, this measure shows the relative attractiveness of stocks versus bonds. The current negative reading suggests bonds may outperform stocks over the coming decade—a rare and concerning signal.

Market Cap to GDP (175%): Often called the "Buffett Indicator," this ratio compares the total value of U.S. public companies to the size of the economy. At 175% of GDP versus a historical average of 80-100%, it suggests markets have become significantly detached from economic fundamentals.

Household Equity Allocation (45%+): This measure tracks the percentage of household financial assets invested in stocks. At current elevated levels near all-time highs, it has historically preceded extended periods of below-average returns, as most potential buyers are already fully invested.

Tobin's Q Ratio (1.6-1.8): Developed by economist James Tobin, this ratio compares market values to replacement costs of assets. Current readings suggest it would cost far less to rebuild corporate America from scratch than to buy it through the stock market—a classic indicator of overvaluation.

Equity Risk Premium (0% to -1%): This measures the extra return investors demand for owning stocks instead of risk-free assets. Current readings near zero or negative suggest investors are accepting historically low compensation for equity risk, often a precursor to disappointing returns.

When these indicators reach extreme levels simultaneously, as they have today, the implications for future returns become impossible to ignore. The consistent message: U.S. equities are priced to deliver real annual returns of just 0-2% over the next decade, dramatically below historical averages and the expectations built into most retirement plans.

Where Investors Can Still Find Opportunity

So if not stocks, then what? Several alternatives offer more compelling risk-reward profiles for patient capital:

1. Fixed Income's Long-Awaited Renaissance

With 10-year Treasury yields around 4.45% and the yield curve beginning to normalize, high-quality bonds finally offer meaningful returns. For the first time in over a decade, you can secure mid-single-digit yields without taking excessive risk.

Preferred stocks from financially solid companies often yield 6-7%, providing both income and the potential for moderate capital appreciation if interest rates decline. Our Real Income Portfolio pays even more - check it out here.

Closed-end bond funds trading at discounts to Net Asset Value present another opportunity. Many offer yields of 7-9% while trading at 5-15% discounts to their underlying assets – a rare combination of value and income.

2. Real Estate: Tangible Value in an Overpriced Market

While residential real estate in many major markets remains frothy, select commercial and industrial properties offer attractive cap rates between 6-9%. Publicly traded REITs focused on necessity-based retail, industrial, and healthcare properties can be found trading at reasonable valuations with dividend yields exceeding 5%.

Unlike the broad market, many REITs haven't fully recovered from their 2022-2023 correction, creating pockets of opportunity for income-focused investors. Take our REIT Portfolio, for example, which has done exceptionally well this year amid all the tariff chaos, and is paying a nice dividend yield too.

3. Energy Infrastructure: Hard Assets With Steady Cash Flow

Midstream energy companies and MLPs continue to offer compelling value with many trading well below replacement cost. The sector provides dividend yields of 6-9% backed by long-term contracts and essential infrastructure.

The transition to renewable energy, contrary to popular perception, will require significant investment in natural gas infrastructure for decades to come, providing these businesses with a longer runway than market sentiment suggests.

4. Community Banks: Hidden Gems With Consolidation Potential

Community banks represent one of the last bastions of genuine value in today's market. Many trade at just 80-90% of tangible book value despite solid earnings and clean balance sheets. This offers a rare margin of safety in an otherwise expensive market – you're buying a dollar's worth of assets for 80-90 cents, something virtually impossible to find in the S&P 500 today.

More importantly, we're in the early stages of what promises to be the greatest consolidation wave in banking history.

Regulatory costs and technological demands are pushing smaller banks into mergers, creating a target-rich environment for investors. When these smaller institutions are acquired, the premiums typically range from 1.3 to 1.7 times book value ,delivering 40-80% returns almost overnight.

By methodically identifying well-run community banks in attractive markets trading below tangible book value, patient investors can position themselves to benefit from this inevitable consolidation while enjoying decent dividend yields and the protection of tangible asset value in the meantime.

I just started a newsletter devoted to finding and tracking all the best community bank opportunities. Check it out here!

It's precisely the kind of overlooked, unsexy opportunity that has consistently delivered outstanding returns to those willing to look where others aren't.

When markets reach extreme valuations, patience becomes more than a virtue , it's a strategic advantage. As I've written many times, the biggest profits often come not from chasing the latest market darlings but from methodically acquiring undervalued assets when others are looking elsewhere.

Today's market presents an unusual divergence: mainstream equities priced for perfection alongside pockets of real value in less fashionable sectors. For investors willing to accept current income and moderate growth rather than chasing speculative returns, the path forward is clear.

Fixed income, select real estate, and energy infrastructure assets offer both reasonable current returns and the potential for capital appreciation when interest rates eventually moderate.

More importantly, they provide essential portfolio ballast should equity markets experience the mean reversion that historical valuation metrics strongly suggest is coming.

As always, value investing isn't about timing markets perfectly or making dramatic all-or-nothing bets. It's about tilting capital allocation toward areas offering the highest probability of satisfactory long-term returns while minimizing permanent capital loss.

Today, that means looking beyond the crowded trade in large-cap U.S. equities toward assets that can deliver reliable income streams with modest valuations – the very definition of an investment rather than a speculation.

The crowd may continue to push markets higher in the short term, but for patient investors focused on the next decade rather than the next quarter, the course of action should be clear: favor value, income, and safety over expensive growth and unfounded optimism.