Bar chart showing the 1-year and 5-year (annualized) forward returns for different ranges of trailing price-to-earnings ratios. For trailing P/E ratios of 5 – 10, the 1-year forward return was 13.6% and the 5-year forward returns was 11.3%. For trailing P/E ratios of 10 – 15, the 1-year forward return was 12.8% and the 5-year forward returns was 9.2%. For trailing P/E ratios of 15 – 20, the 1-year forward return was 7.9% and the 5-year forward returns was 6.0%. For trailing P/E ratios of 20 – 25, the 1-year forward return was 5.4% and the 5-year forward returns was 6.3%. For trailing P/E ratios of greater than 25, the 1-year forward return was -0.6% and the 5-year forward returns was 5.1%.
Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 1954 to June 30, 2023. The S&P 500 Index is a market-capitalization-weighted index considered representative of the U.S. stock market. Index returns do not represent investment performance or the results of actual trading. Index returns represent general market results and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Investing in stocks involves risk and their returns and risk levels can vary depending on prevailing market and economic conditions. All investing involves risk including the possible loss of principal.
Key Takeaways
- The equity market drawdown experienced in 2022 has alleviated the high valuation multiples observed in 2020 and 2021.
- Although they have not reached historically low levels, P/E multiples are now more reasonable relative to history.