Graphic: S&P 500 more expensive vs. 50 years ago
As Pensions & Investments celebrates its golden anniversary, there are some similarities between then and now. In 1973, turmoil in the Middle East led to an oil embargo that set off high inflation and low S&P 500 returns. While comparing different periods can prove challenging, and history doesn’t necessarily repeat, the equity market’s valuation is more expensive now vs. 50 years ago, making it more susceptible to downside risk.
Valuations ups: The S&P 500's dividend yield was 1.6% and price/earnings ratio was 25 as of Oct. 18, vs. 3.5% and 12, respectively, in 1973. Over the past 50 years, the dividend yield averaged 2.8% and P/E 20.
S&P 500 historical valuation
Negative equity risk premium: The equity risk premium, measured by the earnings yield less the 10-year Treasury yield (i.e., the amount paid to take extra risk from equities), is -0.8%. At the end of 1973, it was 1.8%. During that span, the premium peaked in 2011 at 4.7%.
Equity risk premium
Watch inflation: The S&P 500 annual return and the consumer price index have had a -0.14 correlation since 1973. That relationship held this year as the S&P 500 rebounded, returning 13.8% year to date, while inflation fell. Although remaining stubbornly high, the CPI decelerated with a 3.7% year-over-year increase in September compared with 8% for all of 2022.
S&P 500 and CPI
Sources: Bloomberg, Nasdaq, U.S. Department of the Treasury, Morningstar