Goldilocks and the valuation bears

By Kate Moore

The world is enjoying a “Goldilocks” economic recovery – strong enough to keep markets afloat but not so hot as to prompt rapid monetary tightening. Yet many investors are skeptical about equity valuations after an eight-year rally. We delve into valuations today – and their usefulness as a gauge over time.

Equity highlights

  • We find that starting valuations have historically been a poor indicator of future equity returns in the short run. They show a strong relationship with long-term returns in the U.S., but have been a less reliable guide in other markets.
  • Market composition matters. For example, the U.S. valuation premium over Europe vanishes when a handful of fast-growing technology stocks is removed. Regions or indexes with a greater share of higher-margin sectors may trade at sustainably higher valuations, we believe.
  • Elevated equity valuations today could drag down future returns, but we expect dividends and earnings growth to pick up the slack over the medium term. We believe valuations are not as stretched as they may appear – multiples are unlikely to revert to historical means in a world of structurally lower interest rates.


We first composed a blend of five key valuation metrics – including forward price-to-earnings ratios and price-to-book value. We then examined how strong the relationship was between starting valuations – or valuations at the time of purchase – and the variability of subsequent U.S. dollar returns over time. We ran this analysis over almost three decades of equity market history in the U.S., Europe and Japan, and roughly two decades in emerging markets. Check out the results in the chart below. My takeaway: There is a strong relationship between starting valuations and long-run returns in the U.S., but less so in other regions.

Calling all crystal balls
Starting valuations and equity returns, 1990-2017

Chart: Calling all crystal balls

Sources: BlackRock Investment Institute, with data from Thomson Reuters and Worldscope, July 2017.
Notes: The coefficient of determination measures the strength of the statistical relationship between valuations at the time of purchase and subsequent stock market returns for various holding periods. Valuation is an equal-weighted blend of five measures (forward price-to-earnings, trailing price-to-earnings, price-to-book value, price-to-cash, and enterprise value to earnings before interest, taxes, depreciation and amortization). The regression analysis takes equal-weighted averages for each holding period since 1990. The markets are represented by Worldscope indexes. Returns are in U.S. dollars.

Download full report

Chief Equity Strategist
Kate Moore, Managing Director, is Chief Equity Strategist for BlackRock and is a member of the BlackRock Investment Institute.

Op zoek naar meer onderzoek en insights?


This material is for distribution to Professional Clients (as defined by the FCA or MiFID Rules) and Qualified Investors only and should not be relied upon by any other persons.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

Past performance is not a guide to current or future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2017 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylized i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.