The Windfactor Report: November 2025

Valuation Headwinds for US Equities

Our trailing P/E for the S&P 500 Total Return Index is currently 27.8, slightly higher than last month and higher than 93% of periods since 1984. Similar valuation levels have historically translated into strong headwinds for US stock returns.

Historical periods with starting valuations similar to today include select months during 1998-2001, 2003, and 2020-21. Analysis of total returns from these “best-match” periods shows the following:

1. The index rose an average of 4% over the subsequent year but only an annualized average of -1% over the next three years. For comparison, since 1988 the index’s average total return over those time horizons has been 12% and 11% per year, respectively.
2. The index fell over the next year in 42% of best-match periods and was lower after three years in up to 57% of periods. Notably, this accounts for nearly half of all negative 3-year outcomes observed since 1988, despite the relatively small number of best-match periods included in the analysis(~7%).
3. None of the best-match periods saw exceptional returns (30%/yr or more) that the index has achieved with lower starting valuations. The highest 3-yr return was a constrained 17% per year.
4. On the low side, one close comparable period (March 2000) saw annualized 3-yr returns of -16%. For reference, the worst 3-year period during the 2008 financial crisis was only -10%, from June 2007 – June 2010.

Note: These results depend on how closely we match today’s trailing P/E to past values. The following table shows analysis for periods with starting P/E within 3%, 5%, and 10% of today. The story appears consistent at all levels.

Disclaimer:

This report is 100% historical fact and does not constitute investment advice. None of the information should be interpreted as a recommendation to buy, hold, or sell any investment security.

As the saying goes, past performance is not a determinant of future returns. The next 1-3 years may or may not fall within historical ranges. Differences in index asset composition, monetary policy, inflation, and numerous other factors will all play a role in corporate results that drive index dividend returns and investor decisions that drive price returns.