When equity valuations have reached their highest level, as measured by the cyclically adjusted price-to-earnings ratio (CAPE), the average annualized return over the subsequent 10-year period has averaged just above 5% per year.1

For context, U.S. equity markets have remained firmly within the highest valuation level (fifth quintile) since 2013, sustained in large part by unprecedented monetary stimulus. While no one knows for certain what the future holds for stock market performance, current equity valuations suggest that investors might need to lower their long-term return expectations.

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1 Macrobond and FS Investments. S&P 500 Index from January 1, 1950 to December 31, 2018.