Starting valuations make a big difference when forecasting long-term equity index returns.
In the near term, not so much.
Take these charts of the S&P 500 Index. Intuitively, we know lower valuations tend to be associated with higher returns. Over 1-year return periods, the R2 between price-to-earnings (P/E) multiples and returns is a lackluster 0.23, but a remarkably convincing 0.85 for 10-year returns.
S&P 500 Index
For definitions of terms in the chart, please visit our glossary.
It's important to note that U.S. valuations have come down significantly over the past two weeks, improving