Shortly after each month end (after the most recent reported earnings numbers are posted), I like to run through a few of my favorite valuation charts to gauge level, asses risk and to get a sense for what the probable forward return may be. Fortunately, there is a great deal of historical data that can help us.

This week you’ll find several familiar valuation charts and one in particular that I believe can give us a meaningful sense of the stock market’s return over the next ten years. This chart looks at Price Earnings (“P/E”) from 1926-2014 and organizes P/E into five quintiles from the lowest P/E quintile (inexpensively priced market) to highest P/E quintile (expensively priced market).

It should be no surprise that when the starting point is an attractively priced market (lowest P/E quintile), the return over the subsequent ten years is highest at 15.66% per year and when the market is expensively priced (highest P/E quintile), the return over the subsequent ten years is lowest at 4.28% per year.

So where are we now? The market remains in the highest P/E quintile – expect low forward returns.

Let’s keep this week’s post on market valuation short and to the point. I share with you several valuation charts and include a new one (which is a broad look at a number of different valuation measures) I hope you find helpful. In short, stocks remain richly valued.

I conclude today’s post with a few ideas as to what this means and what you can do about it…

Read the rest of the report…


Steve Blumenthal

Founder & CEO CMG

Stephen Blumenthal founded CMG in 1992. He is CEO, Chief Investment Officer and portfolio manager at Capital Management Group, Inc. where he manages equity and tactical investment portfolios. He is a frequent speaker and writer on investment strategies and has been featured in various media sources including the Wall Street Journal, Barron’s, Investor’s Business Daily, Pensions & Investments Magazine, Investment News, RIA Biz and Smart Money. He has been a guest on CNBC, Wall Street Journal Live, and Bloomberg. Mr. Blumenthal is a frequent speaker at industry conferences (NAPFA, IMCA, Index Universe, Opal Financial Group Indexing & ETF Summit and NAAIM) and is author of CMG’s popular investment research commentary. With 30 years of investment management and industry experience, prior to founding CMG, Mr. Blumenthal worked for Merrill Lynch Institutional, Merrill Lynch Retail and Prudential Securities.

Mr. Blumenthal graduated with a Bachelor of Science degree in Accounting from Pennsylvania State University. He is married, has three children and is active in his community coaching youth soccer.