over 2 years ago • 1 min
The current mix of politics, economics, and central bank policy is reminiscent of the second half of the 1960s, investing giant Blackstone argues in a report this month – and that doesn’t bode well for the stock market.
The chart above shows how the compound annual growth rate (CAGR) of investments in the S&P 500 have varied over time with the price-to-earnings (P/E) ratio at which the index was trading when the investment was made. Each dot represents a month.
The chart illustrates a few different trends. For a start, the higher the valuation at which you buy in, the lower the return over the next five years tends to be (shown by the downward sloping black line). But it also shows how the bull market that began in 2009 following the global financial crisis (the brown dots) was a period of above-average returns. And how returns were much lower in the late ‘60s when US inflation, interest rates, and taxes were all – like now – taking off (the green dots).
While in the 2009 to 2020 bull market, low inflation and central bank support helped push up stock market valuations, those trends are all currently in the process of reversing, Blackstone argues. That means future returns will be more reliant on companies growing their profits, rather than investors being willing to pay higher prices for a given dollar of earnings.
“Public equity investors are in for a sixties redux, in which average market returns will be muted and margin expansion will become more difficult,” Blackstone concludes.
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