Valuations could hamper long term performance

Following domestic stocks’ strong run of recent years, Ty Nutt notes that valuations have risen and investors may need to lower their expectation for future returns.

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Valuations could hamper long-term performance

Ty Nutt
Senior Portfolio Manager, Team Leader — Large-Cap Value Equity

The U.S. market has enjoyed much better returns over recent years, and so we have a better mood in the overall market and price multiples have expanded — price/sales, price/book value, price/cash flow, price/earnings, price/dividend. It’s harder for us now to find businesses at substantial discounts to their intrinsic value. In other words, it’s harder to find issues that have upside potential remaining at this point, and so we have to change our return expectations.

We’ve looked at a number of studies of returns from various starting points in terms of valuation. From this level in our overall stock market, we probably need to expect mid-single-digit returns. So, we believe it’s a good time to emphasize value — undervalued stocks may have a good shot at outperforming the overall market and other asset classes.


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