Valuation Warnings Hint at Lackluster Decade Returns

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As the market soars to new heights, whispers of caution are surfacing, and a recent warning from BofA’s Savita suggests that the era of sky-high valuations might be reaching a tipping point. The current multiple of 25x normalized earnings paints a sobering picture, implying a mere +2.6% annualized returns over the next decade based on historical trends.

The gradual ascent of valuations may be leading us toward a ‘suddenly’ moment where valuations become a significant player in market dynamics. BofA’s cautionary note emphasizes the likelihood of lackluster returns in the US stock market over the next 10 years. A detailed examination reveals that buybacks, a significant market force, were flat year-over-year in 4Q, following a five-quarter shrinkage. Buyback authorizations, excluding a notable exception, are tracking -27% year-over-year, adding weight to concerns.

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Adding to the mix, the surprising resilience of the S&P 500 raises eyebrows, with no drop of 2% or more in a single day since February 2023. This unbroken streak, the longest in six years, defies the usual ebb and flow.

Goldman’s Marshall echoes the sentiment, highlighting the lack of appetite for protection, as seen in the QQQ to SPY ratio, reaching heights only surpassed during the dot-com bubble.

In a market poised for change, the warnings hint at a potential stumble, urging investors to navigate with caution and consider the implications of current valuations.

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