Investors are overlooking long-term valuation metrics due to high valuations, potentially leading to lower returns.

From Investing.com: 2025-03-01 03:23:00

Valuations, such as Shiller’s CAPE, play a crucial role in long-term investing returns. However, they are not a market timing tool and do not predict short-term market crashes. Critics argue that valuations have been high for a while, but a market reversion hasn’t occurred. Valuations reflect investor sentiment and overpaying today can lead to lower future returns. As corporate buybacks have surged since 2009, reported earnings per share have sharply risen, despite lackluster revenue growth. This has distorted long-term valuation metrics, making it essential to understand the impact of buybacks on earnings and valuations. The CAPE ratio may overstate valuations by focusing on long-term earnings and creating a duration mismatch. Smoothing earnings volatility with the CAPE-5 ratio shows a high correlation with the S&P 500 index and may be a better measure. The deviation from historical averages for both the long-term and post-WWII periods indicates that current valuations are at levels only seen a few times in history, leading to potential mean reversion. While not market-timing tools, these ratios suggest future market returns will be lower than in the past, so expecting high returns may result in disappointment.



Read more at Investing.com: Markets Are Ignoring a Century’s Worth of Valuation Lessons