Stock Market Valuations and Forward Returns

by | Apr 8, 2024 | Uncategorized

The current S&P 500 index valuation is a poor predictor of returns in the next year, but a strong indicator over the next decade. Therefore, don’t rely solely on stock market index valuations to make selling decisions. ✋

However, data since 1985 shows a strong correlation between valuation and investment returns over the subsequent decade. High valuations tend to bring lower returns over that period.📉

Yet, what is true for the stock market as a whole (index) is not necessarily true for an individual stock. While attractive individual stocks can be found in any market environment, it’s important to note that the price paid for a stock matters. Overpaying, even for a great company, can result in poor investment.

⌛️📉 The key takeaway? Avoid market timing and refrain from betting on a sudden reversion to the norm. 🚫🔮

The scatter plot shows the S&P 500 forward price-to-earnings ratio and the subsequent 1-year and 10-year annualized returns for the S&P 500 price index. The implied 10-year return is based on an ordinary least squares regression of forward returns against forward price-to-earnings ratios. R-squared values are displayed for each regression.

Risk Disclosure: Investing involves risk, including the potential loss of principal. Past performance does not guarantee future results.