The Single Greatest Predictor of Future Stock Market Returns
Starting P/E has Historically Driven Returns

​About 90% of stock market returns over a 10-year period is attributable to starting price-to-earnings (P/E) ratios. Buying low and selling high in terms of P/E has historically driven returns.

  • In the short term, there is no absolutely reliable indicator of future stock market performance. However, when looking at the longer term, there is a strong correlation between realized stock returns and starting valuations.

  • R-squared, or the "coefficient of determination," denotes how much of the movement one variable is attributable to another. In this case, about  90% of S&P 500 Index 10-year returns can be explained by the starting P/E. No other variable is as strong a predictor of future stock market returns.

  • The P/E as of 10/31/16 was 16.3 which implies an annualized 10-year return of approximately 8.0 %.
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The views expressed are the views of Fred Alger Management, Inc. as of November 2016. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security or any funds managed by Fred Alger Management, Inc. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

Risk Disclosures: Investing in the stock market involves gains and losses and may not be suitable for all investors. Growth stocks tend to be more volatile than other stocks, as the prices of growth stocks tend to be higher in relation to their companies' earnings and may be more sensitive to market, political and economic development.

The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. S&P 500 Index: An index of large company stocks considered representative of the U.S. stock market. Investors cannot invest directly in any index. Index performance does not reflect deduction for fees, expenses, or taxes. Investors cannot invest directly in any index. 

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