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A story in charts: why starting valuation matters

Last year's fall in global stock markets left valuations looking much more attractive. That bodes well for future returns.

A story in the charts


Nick Paisner
Head of Editorial

Global equity markets fell significantly last year, but earnings expectations only come down slightly. As a result, they looked a lot cheaper at the end of 2022 than at the beginning, based on a multiple of forecast earnings – a valuation metric known as the “forward P/E.”

Historically, a lower starting valuation has been associated with much better returns over the subsequent decade, as the chart below demonstrates. 

Following months when the S&P 500 has been valued at around 17.5x forecast earnings (the late 2022 level) it has tended to deliver annualised total returns of around 8% over the next decade. This is actually slightly below the long-term average since 1928 of 10%, according to data from NYU Stern School of Business.

As ever, there are caveats to bear in mind. This data is based on the returns since 1990 so it is far from an exhaustive sample. Even if it was a more comprehensive data set, history is not a guide to future performance. There is no guarantee of a positive return, whatever level of valuation you start with.

This may be particularly relevant in the current environment. At the end of 2022, earnings expectations for US companies in 2023 had only fallen by around 5% from their peak. This feels somewhat optimistic given the challenging economic environment faced by consumers and businesses. 

In other words, the earnings forecast on which the valuation depends could well be overstated. If we were to use a more pessimistic (or arguably realistic) forecast, the valuation multiple would look higher, suggesting a less positive outlook for returns. 

Other important points to bear in mind are that this data is based on total returns – so including dividends. Returns based on the index price alone will be lower. It also doesn’t reflect currency movements. Returns for UK-based investors could look very different from those experienced by US investors.

Lower starting valuations associated with better returns

Monthly valuations since 1990 vs 10 year total return for the S&P 500

Monthly valuations since 1990 vs 10 year total return for the S&P 500

Source: Bloomberg, Cazenove Capital

Past performance is not an indicator of future returns and may not be repeated

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.


Nick Paisner
Head of Editorial


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