The Shiller CAPE shows equity valuations are well above historical averages. However, after adjusting for interest rates and inflation, ISG found we’ve reached the high end of the fair-value range.
What does that mean for investors in the future? We need to have more realistic expectations of what the next five to ten years are going to look like from a return standpoint relative to what we’ve seen over the last five to ten years. The Vanguard Capital Markets Model, which ISG runs, points to 3%–5% returns in the U.S. equity market because valuations are a bit stretched.
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