January 7, 2026: The Limits of Prediction – What Valuations Really Tell Us

We do not provide short- or near-term market projections. If we did, our forecasts would be just as likely to match short-term returns as to miss them. Instead, we focus on longer-term projections using models based on long-term mean reversion, which has proven reliable over time—though reversion does not happen immediately or in a straight line.

The starting valuation of the S&P 500®, measured by the 12-month forward price-to-earnings ratio, is a strong indicator of 10-year returns but a poor indicator of short-term results. The past year was no exception. In early 2025, many forecasters were optimistic about economic growth but concerned about S&P 500® valuations, which entered the year at 22x expected earnings—high after two consecutive years of 25%+ returns. Prior performance and current valuation, however, tell us little about the next year’s outcome. More often than not, the S&P 500® continues to rise after consecutive years of 20%+ returns. 2025 followed this pattern. Despite starting the year at a valuation in the top decile of the past 30 years, the market delivered a total return of 17.8%. A relatively small group of stocks continued to drive most of the market’s gains, a trend accelerated by investor enthusiasm for artificial intelligence (AI).

While leadership broadened slightly in 2025, the market remained top-heavy, with the top 10 performing stocks accounting for 49% of U.S. large-caps’ total return. Another strong year leaves stocks generally expensive, limiting our expected long-term returns going forward.

Weekly Market Update: January 7, 2026