Gazing at the Future

Updated
Through 2019

chart & analysis: Gazing at the Future

The starting valuation matters! When P/Es start at relatively lower levels, higher returns follow — paying less yields more. This chart overlays (1) S&P500 Index P/E and (2) annualized returns over rolling ten-year periods. Ten-year returns are offset in the chart to align subsequent returns with starting P/E.

For example, 1909 on the chart includes a green bar that reflects the compounded average annual return for the decade 1900-1909 (i.e., ~9%). 1909 also has a point on the orange line corresponding to P/E at the start of that decade (i.e., 1899, since 1900 is the first year of the ten-year period). Since P/E is time-shifted by ten years, the orange line continues forward to reflect ten-year periods ending in the future, each of which has P/E starting over the past ten years.

As a result, Gazing demonstrates the impact of the starting level of P/E across more than a century of history. The starting level of P/E generally has limited effect on short-term returns, yet starting P/E is the most significant driver for subsequent long-term returns. From the current above-average valuations, below-average returns are likely to follow for the next decade or longer.

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