Chart of the week

Recession or not, equity return backdrop is challenged

Stocks have seen strong year-to-date (YTD) returns, but high valuations portend challenges ahead as this week’s chart shows.

September 22, 2023 | 2 minute read

Average S&P 500 forward returns (annualized)

Source: FS Investments and Bloomberg Finance, L.P., as of August 31, 2023.

  • Stocks have taken a step back since August as Treasury yields have risen and investors come to terms with the idea that rates may remain elevated for the foreseeable future. This week, Fed policymakers punctuated this idea, revising their policy rate forecasts higher for both year-end 2024 and 2025 by 50 basis points.
  • As the market digests these near-term challenges, stock valuations may also present a notable longer-term challenge. Today’s S&P 500 forward price/earnings (P/E) ratio of approximately 18.5x sits firmly in the highest quintile historically.
  • As the chart highlights, investing in the S&P 500 with valuations at these levels has yielded an average forward two-year return of only 3%; over a five-year period, annualized returns have been below 10% in 94% of cases and averaged approximately just 2%.1
  • While the prospect of a soft economic landing helped propel stocks for most of 2023, a range of challenges still lie ahead. Investors should be seeking attractive sources of total return outside public equites regardless of the ultimate economic outcome.

  • Bloomberg Finance, L.P., as of August 31, 2023.

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