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A caution signal for the U.S. equity market?
U.S. equity markets have been on an impressive run during the past five years. The S&P 500 Composite Index returned 15.8% on average annually from 2013 through 2017. Many measures of equity market valuations have risen during this time, including the 12-month forward price-to-earnings ratio, which measures current market price against future earnings expectations. The price-to-earnings ratio at the end of February, which was 17.0, may suggest that future stock market returns will be modest. Since 1985, when the S&P 500’s price has been between 16 and 18 times earnings, annual returns in the following five-year period, on average, were around 4%. Whether this relationship will hold true moving forward is uncertain, but a flexible portfolio may help investors pivot should the investment environment become more difficult to navigate.
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The S&P 500 Composite Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2018 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC.
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