Accuracy of Equity Valuation Methods

Correlation of commonly-used valuation methods to actual subsequent S&P 500 12-year total returns. Weakest correlations listed first; strongest listed last.

“Fed Model (S&P 500 forward operating yield minus 10-year Treasury yield): +29%

log(S&P 500 dividend yield): +75%

log(S&P 500 trailing earnings P/E): -76%

log(S&P 500 forward operating P/E): -77%

log(Shiller CAPE): -86%

log(Tobin’s Q): -86%

log(S&P 500 price/revenue): -89%

log(market capitalization/GDP): -91%

log(market capitalization/GVA): -93%”

– John P. Hussman, Ph.D. (from his Weekly Market Comment on May 30, 2016 entitled Choose Your Weapon)


For a chart of valuation methods that correlate well with actual subsequent 10-year returns see the chart below from John Hussman’s Weekly Market Comment on February 10, 2014 entitled Double Trouble: