The relationship between elevated valuation levels and dismal market returns

Following the market decline of recent weeks, the most reliable valuation measures we identify now project average annual nominal returns for the S&P 500 of about 0.5% in the next 10 years. Those who assert that high equity valuations are “justified” by low interest rates are actually (and probably unknowingly) saying that 0.5% expected returns on equities over the coming decade are a-okay with them. But it’s critically important to understand that while low interest may help to explain why current market valuations have been driven to obscene levels, low rates do not change the relationship – the correspondence – between elevated valuation levels and dismal subsequent long-term market returns. The chart below shows the relationship between the most reliable valuation measure we identify versus actual subsequent S&P 500 total returns over the following decade. The current level of valuations is associated with a likely range of 10-year returns between about -3% and +4%, with an average expectation of 0.5% annually. To read the full article (VIEW LINK)


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