Why valuations matters in the long run

In the short run, valuations may not matter much — as John Maynard Keynes famously said, “Markets can stay irrational longer than you can stay solvent.” But over the long term, history shows a clear pattern: the higher the entry valuation, the lower the expected return.

Today’s chart illustrates this well. There is a strong negative correlation between the S&P 500’s forward P/E ratio and the subsequent 10-year annualized return. At today’s levels — nearly 23x forward earnings — the implied long-term return is among the lowest in decades.

As Mark Twain once noted, “History doesn’t repeat itself, but it often rhymes.” At ECP, we don’t ignore these signals. Instead of chasing the index, we focus on individual companies with undervalued earning power — a selective, fundamentals-driven approach that avoids market excesses.