How Have Recent Developments Impacted Long-Term Returns?

Key Points

  • Global stock market valuations have rebounded to above those of prior market peaks.

  • In the near-term, this is typical and is not anticipated to act as a drag on returns.

  • Over the long-term, a high price-to-earnings ratio has historically had a negative impact on returns.

The rebound of stock valuations to levels above those of prior peaks has some investors worried about the near-term direction of the stock market. But, history shows it isn’t in the near-term that high valuations usually take their toll. Recoveries from recessions and bear markets often see stock market valuations quickly rebound above their prior peak. But over the long-term, these high valuations can lead to below average performance.

Let’s take a look at how recent developments may have impacted long-term returns for stock market investors.

Valuation above prior market peaks

The global stock market has rebounded to a price-to-earnings ratio that has surpassed the level at the markets’ February peak. In fact, the trailing price-to-earnings ratio (the price divided by the last 12 months of earnings) is in line with the average of prior cyclical peaks in the stock market over the past 50 years.

Stock market valuation at cycle peaks and troughs

Source: Charles Schwab, MSCI and Factset data as of 7/31/2020.

We use the trailing 12 month price-to-earnings ratio since 12 month forward earnings estimates are not available prior to the 1990s.