Average down – future equity returns will be lower

While high quality bonds with close to zero yields haven’t offered a feasible investment opportunity since a long time, equities rallied over the last 18 months. However, equities trade now at elevated levels in a historical context and annualized return expectations over the next 10 years are only in the low to mid single digits, especially in case interest rates would creep higher. The S&P 500 12-month forward P/E ratio currently trades at ~22x. Looking from a historical perspective at the subsequent 10-year equity returns at a PE ratio of 20-23x (chart blue shaded part), the performance resulted in a range of 0% to 5%.

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