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Equity valuations are currently near long-term averages, but persistent consumer confidence continues to support higher valuations.

11-7-19 Consumer Main Image

Over the past decade, equity valuations have risen considerably, coming off the extreme lows in the immediate aftermath of the financial crisis, and today sit near long-term averages. A number of factors, including low interest rates and inflation, provide some explanation for elevated price/earnings (P/E) multiples. Investor/consumer optimism is another.

As illustrated in the chart above, there is a clear, positive (albeit imperfect) correlation between consumer confidence and equity valuations, demonstrating that P/E ratios can remain above average for extended periods of time when consumer confidence is high. That’s particularly clear in the late 1990s, when valuations were well above recent levels. Confident consumers are typically willing to spend, directly contributing to economic and earnings growth. That confidence also helps to lift valuation multiples.

Putting it all together, if consumer confidence remains high, equity valuations can also stay elevated (or even rise further) for a sustained period. If economic growth is stable or reaccelerates, the employment picture remains robust, and if several key macro events are resolved, consumers are likely to remain positive — an upbeat disposition that could continue to support higher equity valuations.

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.