We found the CAPE ratio gives a good signal for predicting longer-term equity returns in a model where we assume it will mean revert to its long-term average.
Patrick Moonen and Valentijn van Nieuwenhuijzen (NN Investment Partners) see this as a modest positive for markets in the near-term, but also acknowledge that most of the “good news” on Macron was already priced in recent weeks.
With global equities rising 7% in 1Q2017, valuations appear somewhat high on a historical basis. However, the bulk of this overvaluation is due to elevated multiples in the US, where at 22x trailing earnings, valuations have only been at such a level during the tech bubble of 2000-01.
The resilience in market earnings forecasts is in sharp contrast to the pattern seen in recent years. In each of the past five years (2012–2016) consensus estimates have declined materially in the first quarter. In each case, estimates continued to be reduced through the rest of the year.