High valuations means stocks may not offer great returns in the longer term
By
Published: Oct. 28, 2024 at 6:26 a.m. ET
The New York Stock Exchange may not be the best place to find value in coming years. Photo: Spencer Platt/Getty Images
Referenced Symbols
- SPX-0.03%
- VIX-5.80%
- ES000.46%
- YM000.37%
- NQ000.58%
- TMUBMUSD10Y4.260%
- DXY-0.05%
- CL.1-5.91%
- GC00-0.37%
- F-1.51%
- PYPL0.38%
- MCD-2.97%
- PFE-0.66%
- USDJPY0.25%
- NIK1.82%
- PHIA-17.54%
- PHG-1.62%
Speculators, are you not entertained?!
In the space of just 12 days traders will have had to absorb an end-of-era Japanese election, crucial mega-tech earnings, a U.K. budget, U.S. PCE inflation data, a Bank of Japan policy meeting, the U.S. nonfarm payrolls report, a fiercely contested and tight U.S. election, and a Federal Reserve policy decision.
The chances for volatility in the short term are thus pretty high, one would expect. But it seems equity investors are not particularly fussed. The S&P 500
is up 21.8% so far this year and sits a fraction shy of its record. Meanwhile the CBOE VIX index
, a gauge of expected stock market volatility, is around 20 and only just above its historical average of 19.5.
Still, with so many hefty catalysts looming it might be a time to take a pause and consider the longer term. Much longer.
JPMorgan Private Bank recently released the 29th edition of its long-term capital market assumptions, an antidote says global investment strategist Alan Wynne to the “short termism of modern finance.”
The assumptions provides return and risk expectations for more than 200 assets and strategies in 19 base currencies. “Importantly, as the name would suggest, these assumptions are for the long term (10–15 years), and should help guide investors when making strategic portfolio allocation decisions,” says Wynne.
The fundamental backdrop is supportive. Inflation appears to have been a cyclical event driven by the pandemic and most major central banks are now lowering borrowing costs. Wynne notes that the “misery index,” which is the sum of annual consumer price inflation (2.4%) and the unemployment rate (4.1%), stands at 6.5%, lower than it’s been 85% of the time in the last 50 years. In theory, that should mean households are happier.
“Lower inflation and stronger economic growth create a favorable investing backdrop that lends itself to opportunities across asset classes,” says Wynne.
For equities, he notes that the nearly 20% rise in global markets already this year means future gains have to start from higher valuations, particularly in the tech sector, and this lowers returns expectations. It’s a view that dovetails with recent comments from Goldman Sachs’s David Kostin and others that the market’s strong rally in recent years means it could suffer a decade of much more meagre returns.
Corporate fixed-income assets are relatively attractive as economic resilience, especially in the U.S., has led to tighter credit spreads — the yield compensation investors receive for investing in bonds that are supposedly riskier than benchmark Treasurys.
Private equity faces a number of headwinds, according to Wynne, “including the higher cost of capital; recent fund vintages’ elevated purchase price multiples; historically high levels of uncalled-yet-committed investment capital (dry powder); and a difficult exit environment.”
But it is the real estate sector that Wynne appears most positive about for the longer term. “Elevated rates and challenging debt markets have driven down commercial real estate values,” he says. “We see a generational opportunity emerging for long-term real estate investors as a direct result of valuations significantly re-rating.”
That shift boost return expectations for core assets in the United States, Europe and the United Kingdom due to higher entry yields, Wynne reckons.
“Our 2025 long-term return assumption for U.S. core real estate surges to 8.1% from last year’s 7.5%. Importantly, real estate is not a monolith, and our value-add return assumption climbs to 10.1% from 9.7%,” he says.
Markets
U.S. stock-index futures
are gaining as benchmark Treasury yields
also rise. The dollar index
is fractionally higher, while oil prices
slide and gold
is trading around $2,730 an ounce.
| Key asset performance | Last | 5d | 1m | YTD | 1y |
| S&P 500 | 5808.12 | -0.96% | 1.22% | 21.77% | 41.06% |
| Nasdaq Composite | 18,518.61 | 0.16% | 2.20% | 23.36% | 46.47% |
| 10-year Treasury | 4.276 | 7.00 | 48.90 | 39.51 | -61.93 |
| Gold | 2743.7 | 0.34% | 3.28% | 32.43% | 36.80% |
| Oil | 67.76 | -2.89% | -0.78% | -5.00% | -17.96% |
| Data: MarketWatch. Treasury yields change expressed in basis points | |||||
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The buzz
Companies releasing earnings Monday include Ford Motor
, PayPal
, McDonald’s
and Pfizer
, all after the closing bell.
Oil prices
are sliding more than 4% after Israel’s airstrikes over the weekend did not target Iran’ energy infrastructure.
The Japanese yen
fell to its lowest in three months after the ruling coalition looked set to lose its parliamentary majority following Sunday’s election. The Nikkei 225 stock index
rose 1.8%.
Shares of Philips
are sliding as the Dutch healthcare devices company lowered its sales outlook for the year, citing a “significant deterioration” in China demand.
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The chart
Investor buy-the-dip mentality has been on show of late. The chart from Jason Goepfert at Sentimentrader shows how the S&P 500 has not had two down days in a row for 30 sessions. When the stock benchmark has the temerity to register a negative day investors push it up the next.
Source: Sentimentrader
“This is one of the longest streaks in its history, with the Nasdaq not far behind,” says Goepfert. Similar streaks of buy-the-dip activity preceded gains over the next 6-12 months almost without fail, he notes.
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
| Ticker | Security name |
| TSLA3.34% | Tesla |
| NVDA0.80% | Nvidia |
| GME-0.29% | GameStop |
| DJT11.44% | Trump Media & Technology |
| TSM2.78% | Taiwan Semiconductor Manyfacturing |
| PLTR2.98% | Palantir Technologies |
| AAPL0.36% | Apple |
| NIO5.62% | NIO |
| AMD1.82% | Advanced Micro Devices |
| PHUN25.00% | Phunware |
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About the Author
Jamie ChisholmFollow
Jamie Chisholm is a markets reporter based in London.