S&P 500 index valuation, October 2025
Macro: S&P 500
We assert that the primary determinant of future total returns is the relative valuation of the index at the time of acquisition. Our valuation metric utilizes the Price/Peak Earnings multiple. By incorporating peak earnings, our approach is conservative, independent of analyst estimates, resilient to short-term business fluctuations, and unaffected by immediate accounting distortions. We compute annualized total returns under various scenarios of multiple expansion or contraction.
Our analysis spans multiple metrics—minimum, mean, median, and maximum multiples—based on data since December 1900. Foundational assumptions for nominal growth and horizon period are set at 4% and 12 years, respectively. Graphical representations illustrate the historical correlation between predicted and actual returns.
Sensitivity analysis accompanies our baseline assumptions. The first table examines the impact of altering the horizon period on future returns, while the second table explores changes in returns with variations in the growth assumption, keeping other factors constant.
Furthermore, we provide data on duration, over(under)-valuation, inflation-adjusted price/10-year real earnings, dividend yield, option-implied volatility, skew, realized volatility, historical relationships between inflation and P/E multiples, and historical connections between P/E multiples and realized returns.
Our analytical approach does not aim to predict short-term movements in the S&P 500 Index. Instead, it focuses on discerning the index’s current relative valuation and inherent risk.
Author
James Brett Freeze, CFA
Global Technical Analysis
Mr. Freeze has 30 years of experience, having managed capital in both major financial institutions and private investment funds.
