Some unpleasant valuation arithmetic for equities

Developed-market equities are materially overvalued because their price–dividend ratio has risen faster than fundamentals justify, implying lower long-run excess returns.

• Fulcrum’s MARS system links valuations to expected dividend growth, real risk-free rates and equity excess returns instead of judging the price–dividend ratio against its historical average alone.
• The current price–dividend ratio is 71% above its long-run mean; 38 percentage points are attributed to fundamentals and 33 points to the valuation gap.
• MARS estimates that developed-market equities are 19% overvalued, a level reached only twice in the past 70 years: briefly in the late 1980s and again in the late 1990s.
• MARS forecasts annualised dividend growth of 11.5% over 2025–2029, versus 10.6% in analyst estimates, but expects only 6.85% nominal dividend growth over the long term.
• At current prices, the model implies a 4.97% annual equity excess return; fair value would require 7.4% nominal dividend growth and would restore the long-run 5.50% excess return.

Takeaway: The valuation signal argues for a marginally lower equity weight than a long-run strategic allocation would imply, although Fulcrum combines it with shorter-term activity, inflation, volatility, momentum and risk-appetite signals before setting the dynamic allocation.