Executive Summary 

• Investors should temper their return expectations during late-stage expansions and be watchful for excesses.
• If history is a guide, the current bull market still has room to run despite premium valuations and the late-stage expansion.​
• Investors may benefit from opportunities in small caps and Japanese equities based on fair valuations and strong earnings expectations.​
• Premium valuations and a late-stage expansion justify neutral risk positioning with active rebalancing and diversification efforts.​

Investors should temper their return expectations during late-stage expansions and be watchful for excesses​

Shown in the left panel are annualized total returns (y-axis) and annualized standard deviations of total returns (x-axis) for the S&P 500 during the various stages of the economic cycle since 1962. The stages of the economic cycle are defined as the following: Recession refers to periods of economic downturn, Early Cycle to rebounds from recessions, Mid Cycle to ongoing growth up to the economy’s potential and Late Cycle to periods where the economy is operating at or above potential. The table in the right panel shows key statistics around the stages of the business cycle in the U.S. since 1962, based on a Glenmede analysis of typical economic behavior from a handful of leading and excess indicators. The S&P 500 is a market capitalization weighted index of large cap stocks in the U.S. Past performance may not be indicative of future results. One cannot invest directly in an index.

• The S&P 500 has historically delivered 9% returns during late cycle which may not be as robust as in early (30%) and mid cycle (12%), but strong enough to warrant a full weight to risk assets. ​
• Investors should avoid complacency and remain watchful for excesses due to higher recession risks in a late-stage expansion.

Equity valuations remain above fair value

Glenmede’s estimate of long-term fair value for U.S. large cap is based on normalized earnings, dividend yield and book value using MSCI’s USA Index, which is a total return index with dividends reinvested. Past performance may not be indicative of future results. Glenmede’s estimates of fair value are arrived at in good faith, but longer-term targets for valuation may be uncertain. One cannot invest directly in an index.

• Another dimension investors must consider is valuations, as the price one pays for an investment is a key determinant of returns over the long run.​
• Large cap equities currently sit at the 87th percentile of longer-term fair value based on various metrics, including normalized earnings, cash flows, dividend yield and book value. ​

Does a late-cycle bull market with premium valuations have further room to run? History says yes

Domestic equities appear expensive but are mostly driven by significant premiums in growth stocks​

Data shown are Glenmede’s estimates of long-term fair value for U.S. Large Cap (MSCI USA), U.S. Large Cap Growth (MSCI USA Growth), U.S. Large Value (MSCI USA Value), U.S. Small Cap (MSCI USA Small Cap), International (MSCI All Country World ex-U.S.), Europe (MSCI Europe), Japan (MSCI Japan) and Emerging Markets (MSCI Emerging Markets) based on normalized earnings, normalized cash flows, dividend yield and book value of each index. Past performance may not be indicative of future results. One cannot invest directly in an index.