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.

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Industry Voice: Should you be worrying about equity valuations

©2021 BMO Global Asset Management. BMO Global Asset Management is a registered trading name for various affiliated entities of BMO Global Asset Management (EMEA) that provide investment management services, institutional client services and securities products. Financial promotions are issued for marketing and information purposes; in the United Kingdom by BMO Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority; in the EU by BMO Asset Management Netherlands B.V., which is regulated by the Dutch Authority for the Financial Markets (AFM); and in Switzerland by BMO Global Asset Management (Swiss) GmbH, acting as representative office of BMO Asset Management Limited. These entities are all wholly owned subsidiaries of Columbia Threadneedle Investments UK International Limited, whose direct parent is Ameriprise Inc., a company incorporated in the United States. They were formerly part of BMO Financial Group and are currently using the "BMO" mark under licence.

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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Disclaimers:

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any stocks or products that may be mentioned.

©2021 BMO Global Asset Management. BMO Global Asset Management is a registered trading name for various affiliated entities of BMO Global Asset Management (EMEA) that provide investment management services, institutional client services and securities products. Financial promotions are issued for marketing and information purposes; in the United Kingdom by BMO Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority; in the EU by BMO Asset Management Netherlands B.V., which is regulated by the Dutch Authority for the Financial Markets (AFM); and in Switzerland by BMO Global Asset Management (Swiss) GmbH, acting as representative office of BMO Asset Management Limited. These entities are all wholly owned subsidiaries of Columbia Threadneedle Investments UK International Limited, whose direct parent is Ameriprise Inc., a company incorporated in the United States. They were formerly part of BMO Financial Group and are currently using the "BMO" mark under licence.

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