Historical Valuations

IF YOU HAD BOUGHT U.S. stocks a century ago, at year-end 1923, you would have paid less than nine times trailing 12-month reported earnings and collected an initial dividend yield above 6%.

In the years that followed, both the market and valuations fluctuated widely, with shares posting healthy gains in the 1920s, suffering mightily in the 1930s, bouncing back in the 1940s, roaring in the 1950s, losing steam in the 1960s and struggling through the 1970s.

By July 1982, after more than 16 years of often wretched stock returns, investors had scant appetite for stocks. Shares traded at less than eight times earnings and had a dividend yield of 6.2%. A spectacular two-decade bull market followed, interrupted only briefly by the 1987 market crash and the 1990 market decline. By early 2000, U.S. stocks were trading at a flabbergasting 29 times earnings and yielded just 1.2%.

There followed not one but two huge bear markets, both of which saw the price of U.S. stocks roughly cut in half. By the end of the second bear market, in early 2009, stocks were at a statistically meaningless 110 times earnings. That price-earnings multiple resulted from severely depressed corporate profits at many corporations and huge losses at a few companies.

A truer gauge of stocks’ value was the dividend yield, which stood at 3.6%, though even that was a little misleading because many companies were slashing their dividends at the time. Still, by the 2009 stock market bottom, stocks were yielding more than 10-year Treasury notes. That had been typical up until 1958, but many market participants never thought they’d see it again.

From the 2009 market bottom, shares quintupled in price—and the return was even higher if you included dividends. After that long rally, U.S. stocks stood at 24 times trailing earnings as of year-end 2019, with a dividend yield of 1.8%. That wasn’t cheap by historical standards, though valuations alone can’t explain what happened next.

In early 2020, the COVID-19 pandemic struck and the economy came to an abrupt halt, triggering a 34% plunge in the S&P 500. But almost immediately, stocks staged a remarkable recovery that continued into 2021, only for the market to fall sharply in 2022 and rebound in 2023. Result? By year-end 2023, stocks were trading at 26 times earnings and yielding 1.5%.

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