As extensive empirical studies have shown that valuation metrics explain a sizeable portion of the variation in expected equity returns, it is only rational to use them in forming reasonable long-run expectations. As U.S. equity valuation has been persistently high over the last years, supported primarily by accommodative monetary policy, strong earnings growth and contained risk aversion, there are numerous analysts that expect that they will eventually mean revert. It is, however, difficult to estimate the exact timing of a possible mean reverting process.
The relation between alternative, widely-used, valuation metrics and subsequent equity returns over different investment horizons is explored and projections related to U.S. equity market performance are formed.
Iniohos Advisory Services is an independent investment research and consulting house, founded by investment professionals with long and in-depth experience in global financial markets.
Iniohos Advisory Services aims to provide top-end investment solutions to High Net Worth Individuals and institutional investors, ranging from proactive investment research to tailor made financial and risk modelling.
Our research covers the areas of investment and macroeconomic research, investment strategy and asset allocation, financial modelling and risk management.
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