The Trick To Estimating Your S&P 500 Returns

Luke Suddards

8 days ago1:35 min

The Trick To Estimating Your S&P 500 Returns

The recent bear market has sent valuations for the S&P 500 sliding downward, and you should pay close attention to that. See, a stock’s valuation plays a crucial role in determining your long-term returns: Bank of America’s (BoA) research shows that valuations – that’s normalized price-to-earnings (P/E) ratios in this case – explain a whopping 80% of the variation in future 10-year S&P 500 returns. Put simply, the lower the P/E ratio, the better your odds for higher future returns. And based on market cycles dating from 1987 to today, BoA’s model predicts annualized price returns of roughly 5% based on the S&P 500’s current 22x P/E ratio. Factor in a 2% dividend return, and you’ll get total returns that sit around 7%.

BoA’s research backs up another well-known adage: time heals all wounds

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