Do Valuations Matter?

In an investment landscape where traditional valuation metrics are constantly challenged, investors are increasingly asking: do valuations still matter in today’s market?

The old principle of mean reversion appears to contradict the phenomenon that expensive assets can climb even higher and seemingly cheap investments can become value traps.

The paper discusses the relationship between valuations and assets returns. This analysis has been conducted in three parts:

1. Using a time-series approach to analyse whether valuations are good predictors for future returns. This has been done via the US S&P 500 index.
2. On a cross-sectional basis to assess whether assets with cheaper valuations outperform the expensive ones and the underlying drivers of the relative performance.
3. Analysing the underpinning factors and potential risks associated with the current high stock market valuations in the US.