Since the sharp reversal in developed countries’ stock markets at the end of March, many have asked whether the market has become irrational. Given the extreme uncertainty surrounding the new outbreak, record unemployment and the decline in US GDP in the second quarter, how can the market still reach an all-time high? < / P > < p > possible answers range from “no choice” to young investors driving the market through new digital investment platforms. However, vanguard’s investment strategy team believes that the answer is fundamental and does not believe that the behavior of the US stock market is irrational. Vanguard’s proprietary fair value Cape (cycle adjusted price earnings ratio) framework establishes the relationship model among stock valuation, long-term bond yield and inflation. It shows a rise in the fair value range since the first quarter. Interestingly, the cap of the S & P 500 index at the end of July fell right in the middle of this range, which means that valuations as of the end of July were fair based on interest rates and inflation. < / P > < p > What does this mean for future stock prices? It depends. The higher fair value range will not necessarily remain high or continue to rise. It does not mean that the market price will not deviate from the fair value temporarily. Normalization of interest rates and inflation expectations will lead to a decline in fair value (other things unchanged), but prices may not immediately catch up due to other short-term factors. However, over a longer period of time, these deviations are expected to return to their fair values over the past 70 years. < / P > < p > vanguard’s global economic team does not expect monetary policy to normalize soon, and the federal funds rate will remain near zero until at least 2021. In the foreseeable future, despite the unprecedented monetary and fiscal policies adopted by developed countries, the imbalance between supply and demand may lead to lower rather than higher inflation. This means that significant changes in fair value are unlikely. < / P > < p > news about vaccine development or effective therapy is better than expected, which may lead to stock price deviation from the overvalued range. On the contrary, if these developments take longer, or if containment measures prove unsuccessful, prices may enter undervalued ranges as market sentiment falters.