Are Stocks Cheap Yet (Or Even Fairly-Valued)?

We’re over 15 months into this bear market. The S&P 500’s peak close was on January 3rd of last year at $4,796 while it’s recent close is $4,124 for a price decline of about 14% so far (although was down much more than that last year).

So, the question is, are U.S. stocks cheap, or even fairly-valued, yet? Well, let’s see…

Recall that the stock market’s return is a function of sales, profit margins, an earnings multiple and dividends. So, what does that imply for current valuations and forward returns?

See the image below for a matrix of potential returns under a variety of conditions.

You’ll notice the range of returns listed is a 3.4% annualized LOSS to a 5.7% annualized gain with an average expectation of 1.4% (middle blue box) over the next twelve years.

U.S. stocks do not appear cheap yet. Far from it. The expected return for the U.S. stock market is around 2% while we can buy 1-year to 10-year treasuries yielding between 4.8% to 3.5% with significantly less risk and lower volatility. The risk/return tradeoff for U.S. stocks is very poor right now because the current price is too high.

What does a fairly-valued / cheap market look like? Well, refer to the matrix below from 12/31/2008 near the depths of the Great Financial Crisis.

In this case, the same analysis used above would have resulted in an expected range of 6.1% to 16.0% annualized returns for twelve years with an average expectation of around 11.4%! Even the low end of the range was over 4x greater than the current average return expectation.

The 12-year return from that point ended up being about 15% annualized.

Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.

Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions. Many different factors impact prices including factors not mentioned here.

This is not investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.

Views provided here are current only as of the moment of posting and are subject to change at any time without notification.

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