History is foreshadowing the worst of times for markets
As we enter 2025, the general consensus is that stocks are set to deliver another year of decent returns. Most strategists contend that we will be in a goldilocks environment characterized by positive readings on economic growth, profits, inflation, and rates. This sentiment is particularly evident in the current valuation level of the S&P 500 Index.
Regardless of which metric one uses, the index is extremely elevated relative to its historical range. Interestingly, U.S. stocks are an outlier when compared to other major markets (including Canada), which are trading at valuations that are in line with historical averages.
Unfortunately, the history books are quite clear about what can happen to markets that attain peak valuations. The four largest debacles in the history of modern markets were all preceded by peak valuations.
The bottom line is that markets have historically been a very poor predictor of the future. The loftiest valuations have not just been followed by tough times, but by the worst of times.
There is one common feature to these sorrowful tales of peak multiples that ended in tears. In each case, peak valuations followed a prolonged period of near-perfect environments characterized by strong economic and profit growth.
The S&P 500 Index currently stands at its highest multiple in the postwar era, except for the late 1990s tech bubble. Optimists justify this development by pointing to what they believe to be a rosy future with respect to the U.S. economy, earnings, inflation, and interest rates. Sound familiar?
Every bubble has been spurred by a miraculous new technology or invention that promises to change the world. Canals, railroads, automobiles, electricity, and telephones were all enablers of
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