Chart of the Week: Don't Look Back In Anger

Stock markets remain near record highs because earnings have grown while investors have become less willing to pay high valuation multiples for future growth.

• Investors are concerned about AI-related capital expenditure, inflation, energy prices and conflict in the Middle East, yet equity markets have continued to rise.
• The S&P 500 forward P/E multiple fell from around 23 times earnings last September to around 19 times this September, close to its 10-year average.
• This represents roughly a 17% reduction in the price investors pay for each dollar of forecast earnings.
• The ten largest companies, many linked to the AI boom, saw their forward P/E fall from around 31 times earnings to around 21 times, a decline of about 31%.
• Forecast company earnings have continued to grow, offsetting the effect of more cautious valuation assumptions and allowing markets to rise without higher multiples.

Takeaway: The market is near all-time highs, but its valuation has become more reasonable; the lower P/E suggests that some scepticism is already reflected in prices, although risks remain.