Put simply, valuations have enormous implications for long - term investment returns, and for prospective market losses (or gains) over the completion of any market cycle, especially those that feature historically
extreme valuation peaks (or troughs).
Not exact matches
Yet the fact that these 13 years have included three successive approaches (2000, 2007, and today) to
valuation peaks - at the very
extremes of historical experience - is evidence that investors don't appreciate the link between
valuation and subsequent returns.
Even the 4 % annual total return of the S&P 500 in the 15 years since the 2000
peak has been made possible only by driving current
valuations to the second most
extreme point in U.S. history.
You'll notice that the overvaluation at the 2000
peak was really dominated by
extreme valuation in the top decile of price / revenue ratios.
I've noted before that while the bubble
peak in 2000 was the most
extreme level of
valuation in history on a capitalization - weighted basis, the recent speculative episode has actually exceeded that bubble from the standpoint of speculation in individual stocks.
But this reasonably good outcome results precisely from the fact that the
extreme valuations at the 1987
peak are roughly matched by the
extreme valuations of today.
The S&P 500 registered a record high after an advancing half - cycle since 2009 that is historically long - in - the - tooth and already exceeds the
valuation peaks set at every cyclical
extreme in history but 2000 on the S&P 500 (across all stocks, current median price / earnings, price / revenue and enterprise value / EBITDA multiples already exceed the 2000
extreme).
You'll notice that recent
valuation extremes actually moved beyond the 1929 and 2000
peaks.
Equally worthy of note, the very same
valuation measures during the bullish
peaks in the 20 - year period never approached the mindless
extremes that exist at present.