Key facts
- Bank of America's normalized price-to-earnings ratio for the S&P 500 is 32.
- The bank projects an average annual return of -3% for the S&P 500 over the next decade based on current valuations.
- The S&P 500 equal-weighted index has a normalized PE ratio of 25.
- Bank of America projects an average annual return of +3% for the equal-weighted index over the next decade.
- Six other valuation gauges also suggest negative returns for the S&P 500 by 2036.
- The average implied return from all 10 valuation signals tracked by BofA is -1.4%.
Bank of America strategists have warned that current stock valuations suggest the S&P 500 may deliver negative annual returns over the next decade. In a September 14 client note, the bank highlighted that the index's normalized price-to-earnings ratio, which averages earnings over multiple years, stands at 32. This level implies an average annual return of -3% for the S&P 500 over the coming 10 years.
The bank recommended the S&P 500 equal-weighted index as a potentially more attractive investment, citing its normalized PE ratio of 25, which implies an average annual return of +3% over the next decade. Bank of America stated that its normalized PE ratio is a remarkably accurate predictor of long-term returns, explaining approximately 80% of the S&P 500's returns over 10-year periods.
Six other valuation gauges tracked by Bank of America, including the Shiller PE ratio and price-to-book value, also indicate negative returns for the S&P 500 by 2036. The average implied return across all 10 valuation signals is -1.4%.
Despite these cautionary signals, the bank acknowledged that the market-cap-weighted index might prove more resilient than valuations suggest. Factors such as stocks' potential to outperform bonds in stagflationary environments and the high quality of current S&P 500 companies, characterized by low debt and stable earnings, could offer some buffer.
Nevertheless, Bank of America expressed a preference for the equal-weighted index due to its more favorable valuation levels. The Invesco S&P 500 Equal Weight ETF (RSP) provides exposure to this alternative index.