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Chart of the week

Historically high valuations challenge equity returns

Stocks have generated paltry forward returns during historical periods when valuations have been as high as they are today.

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October 25, 2024 | 2 minute read

Average S&P 500 forward returns (annualized)

Graph showing the S&P 500’s forward returns over the 1-, 2-, 3-, 5- and 10-year periods within each of the index’s price/earnings quintile. Historical returns have been meager when the index is in its most expensive quintile, as it is today, ranging from a maximum of 5% over the 1-year period to just 2% over the subsequent 10-year period.

Source: FS Investments and Bloomberg Finance, L.P., as of October 23, 2024.

  • After racing higher for much of the year, stocks have hit a speed bump over the past two weeks as Treasury yields have risen, retracing part of their year to date (YTD) decline, while markets back off their most aggressive expectations for Fed rate cuts.
  • Rising Treasury yields have ushered in a broader tightening in financial conditions including a rise in mortgage rates and a significantly stronger U.S. dollar. This has caused some market participants to question the longer-term outlook for stocks, particularly given their elevated valuations.
  • At 21.8x, the S&P 500’s forward price/earnings (P/E) ratio sits firmly in the highest historical quintile.1 With valuations at these levels, investing in the S&P 500 has historically yielded an average forward two-year return of just 3%. Returns have been similarly paltry over longer periods—at just 2% over both the 5- and 10-year periods.1
  • While stocks could continue their steady rise (powered by a strong U.S. economy and resilient corporate earnings), investors should consider their risk/reward outlook, given their historically high valuations today.
  • Against this backdrop, the case for alternatives that offer diversification and growth potential continues to be attractive.

  • FS Investments and Bloomberg Finance, L.P., as of October 23, 2024.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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