In this week’s economic update, we are looking at market valuations and return expectations going forward. While being in the market is what we believe counts most for long-term investors, it remains an interesting exercise to examine the long-term return potential of various asset classes and answer questions like where are valuations today and what expectations should we have?
We also want to share our participation in the Milton Chamber of Commerce's Milton Sports Celebrity Dinner that took place on April 3rd 2024. We were proud to one again be presenting sponsors of this great event, supporting and helping to raise money for the Chamber's Scholarship Fund.
Economic Update
Global equity markets have been somewhat directionless over the past few weeks, likely taking a breather after a reasonably good first quarter. Investors are digesting recent jobs reports in Canada and the U.S. Meanwhile, the consensus view remains that rate cuts are looming in the second half of the year though the exact timing and degree of cuts are topics of debate given recent comments from a few officials at the U.S. Federal Reserve. Given the strong global equity market gains over the past year, we discuss market valuations and return expectations going forward.
No replacement for being in the market
A simple and intuitive framework for longer-term investing is the adage: buy low, sell high. Certainly, returns can feel more rewarding when investing at more inexpensive valuations and less satisfying when made at elevated valuations. Without a crystal ball or the benefit of hindsight, it’s nearly impossible to time the market perfectly – and so a winning strategy for many investors involves building a plan and investing regularly. It is our opinion that being in the market is what counts most for long-term investors. That said, it is an interesting exercise to examine the long-term return potential of various asset classes and answer questions like where are valuations today? And importantly, what expectations should we have for longer-term returns from equities?
The U.S. stock market appears expensive, but more reasonable when removing the ‘Magnificent 7’
On the surface, the large cap U.S. stock market, as measured by the S&P 500 index, appears expensive. That’s not that surprising given how well it has performed since the lows reached in the fall of 2022. Its forward Price to Earnings ratio, which reflects the current price divided by the earnings expected from the companies within the index over the next twelve months, currently sits at about 21. That compares to its average of 16 over the past twenty to thirty years. But, as has been well documented in recent months, the gains of the U.S. market over the past year have been heavily influenced by the performance of the “Magnificent 7”, a group of seven large technology stocks. If we strip out these seven stocks, the market’s P/E ratio falls to a more reasonable range of 17-18. In other words, the U.S. market is not cheap but may not necessarily be as expensive as one would think.
Other markets tell a similar story
A similar story exists elsewhere. The forward P/E ratio for the Canadian equity market is just below 15, which is around its long-term average. The same ratio for overseas developed markets is also just below 15, which is slightly higher than its long-term average. In emerging markets, the ratio is nearly 12 which is also just above its longer-term average.
Summary
The key takeaway is that despite the fact equity markets have done well since the lows reached in 2022, the valuation levels, outside of some of the largest technology stocks in the world, are not necessarily at the kind of elevated levels that would suggest investors need to meaningfully recalibrate their long-term return expectations. Nevertheless, should markets continue to march forward without a meaningful pick-up in earnings, we may have to revisit this exercise as it could be indicative that markets have pulled forward some of the future return potential from the asset class.
Bumpy recovery for Canada’s housing market
On April 3rd, Elinesky Schuett Private Wealth had the privilege to bring presenting sponsor for the Milton Sports Celebrity Dinner, organized by the Milton Chamber of Commerce in support of their Scholarship Fund.
As active members within the Milton community and with the Chamber of Commerce itself, we are thrilled to be supporting the Scholarship Program and helping make post-secondary education more accessible to deserving local high school students. The evening was fantastic - exciting games, entertaining celebrities, and generous fundraising for a great cause.
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.