Today’s high stock market valuations are an important indicator of expected returns, but advisors should be careful about concluding they’re investing at the top of the market.
That point is made in a market note by Richardson GMP’s Graig Basinger, who says valuations are important for estimating future returns.
“Given current elevated valuations, return expectations should be muted somewhat,” he writes. “But it doesn’t mean sell the market, as valuations can remain elevated for some time. For example, the S&P 500 was in the most expensive quartile this time last year and has since risen +19%. That being said, the market is now deeper into that most expensive quartile.”
The S&P 500 index reached a record 2,400 points on Tuesday after the weekend’s French elections brought in Emmanuel Macron and dispelled fears of an EU breakup.
The average PE (price to earnings) ratio based on trailing earnings for the S&P, dating back to the 1950s, has been 16.5 times, and today it is 21.3 times, Basinger says.
“Yes, by just about every variation of the market’s price-to-earnings multiple, it is on the expensive side,” he writes, but cautions: “Valuations don’t signal market tops or bottoms, but they do provide some insight into future return expectations.”