Industry Voice: Should you be worrying about equity valuations
After the brutal sell-off in the first quarter of 2020, equity markets embarked on a rally which was to confound even the most optimistic expectations.
Despite lockdowns leading to a collapse in economic output and a sharp downturn in market-wide company profits, equity markets have reached new record highs, pushing valuations to historically high levels. But, in a world where interest rates are at all-time lows, equities still represent relative value. Is this meteoric rise in equities a signal to investors that a sustained market downturn is imminent? We think not. Paul Niven, Head of Portfolio Management, Multi-Asset Solutions, explains why he is still positive on equities.
Valuations are above their dotcom peak
At 33 times estimated 2020 earnings, the current price-to-earnings (PE) ratio of the S&P 500 index, is at a record high. While headline multiples are inflated by depressed earnings, the PE ratio is higher than it was at the start of 2000, just before the dotcom bubble burst, when the PE ratio of the index was 31. There is a strong case that, with high multiples, future returns will be lower, but one needs to be cautious about a fixation on historic comparisons and drawing strong conclusions over near-term return prospects.
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