Those high P/E ratios for S&P 500 stocks must mean poor returns going forward…not so fast!
This scatter diagram made me pause and think.
As it seems to go counter to a lot of research and many charts I have seen on the topic of current valuations and projected future returns.
Here is why this is not a contradiction.
The poor expected returns typically correspond to a 10-year timeframe.
Whereas the weak link between the P/E ratio and the S&P 500's shown in this chart relate to a one-year timeframe.
Which goes to prove that in the short-term anything is possible.
Over one-year the market is a voting machine.
Over ten years I would expect it to be a weighing machine.
(To use the famous analogy from Warren Buffett's mentor Benjamin Graham.)
So I will try not to predict where the stock market will be in the next year or two.
But that doesn’t mean I won’t be prepared for the inevitable drawdowns along the way.