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Although equity returns in 2018 may have disappointed, equity valuations look much better today than they did at this point a year ago.

Valuations graph

Coming into 2018, the Price/Earnings ratio for the S&P 500 was above its 25-year average. While arguably not grossly overvalued, stocks were also certainly not cheap. Since then, a combination of factors have brought valuations back down to more attractive levels. Favorable economic conditions and corporate income tax reform helped to boost earnings, while the uptick in market volatility in Q4 weighed on stock prices. The combination of a lower “P” and a higher “E” pulled the forward P/E on the S&P 500 below its 25-year average, as illustrated in the chart above.

A host of cyclical factors and risks could contribute to volatility remaining elevated for some time. It’s also very likely that pace of earnings growth will slow in the coming quarters. Still, solid fundamentals, an expanding economy, and rising corporate earnings (even at a slower pace) should be supportive of equities. Those factors, coupled with the repricing of equities in recent months, have pushed valuations to their lowest point in about three years and contributed to better forward-looking return expectations for stocks.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.