Valuation Based Equity Market Forecasts, Q1 2013 Update

Darwin Investment Strategies

Article

1 Pages

This paper examines how a range of long term valuation measures can be combined to estimate future equity market returns over 10 year horizons. It argues that expensive markets often deliver below average long term outcomes, even if prices continue rising near term, while introducing several complementary valuation frameworks beyond Shiller CAPE.

Key Takeaways

Multiple Valuation Measures: Combining 4 valuation indicators, including Shiller CAPE, Q Ratio, Market Cap to GNP, and long term price trend, improves 10 year return forecasts over relying on a single metric.
Long Horizon Focus: The analysis emphasizes 10 to 20 year expected returns, arguing that elevated valuations today have historically been associated with materially lower long term investment outcomes.
Current Valuation Signal: The authors conclude that prevailing valuations in Q1 2013 implied future real equity returns well below historical averages despite the possibility of further short term market gains.
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