Capital Markets Winter 2021

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Many Happy Returns? Lending vs. Owning

• Strong relationship between starting valuations and ensuing 10-year returns with current data suggesting equities will outperform bonds over the coming decade ‒ Note that low real interest rates and stronger free cash flow generation imply higher multiples relative to history (see pages 23 & 24)

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S&P 500 CAPE vs. 10-Year Returns Since 1950

25%

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= month = current

R² = 0.68

20%

15%

10%

IV

5%

Return

0%

-5%

V

-10%

5x S&P 500 10-Year Annualized 10x

15x

20x

25x

30x

35x

40x

45x

S&P 500 Cyclically Adjusted Price/Earnings (CAPE)

Source: FactSet. Each dot represents the P/E during that year and the returns generated over the subsequent 10 years. The starting CAPE ratio is the price divided by the cyclically adjusted EPS, which is the average of the EPS over the last decade at the start of each 10-year period measured. Annual data utilized from 1950 through 2020. R-squared is a statistical measure used to analyze how differences in one variable can be explained by the difference in a second variable. The performance data quoted represents past performance, which is not an indication or a guarantee of future results.

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