According to the financial model of the investment company Crescat, the current valuation of US equities is practically the highest in history. As the following chart and table show, most of the valuation indicators on which the model is based are now at or near the level of the 100th percentile, or the highest level in history. The data date back to 1900.
It is precisely these valuations that are key to the medium-term expected equity performance. The higher the valuation, the more expensive the equities and the lower the expected returns. Conversely, the lower the valuation, the cheaper the equities and the higher the expected returns.
Our internal valuation models also indicate that US stock prices are now extremely overvalued. Therefore, I would not be surprised at all if, on average, annual returns over the medium term of the next five years were only around zero. At the same time, we fully reflect this prediction in our global equity allocation, in which we have US stocks strongly underweighted relative to benchmarks.
Investment Strategist at Conseq Investment Management, a.s.