TSX lower after index logs fresh record closing high
Investing.com -- Deutsche Bank cautioned in a note to clients on Wednesday that while U.S. equities are being supported by “bullish forces” such as the historically strong performance during a non-recessionary rate-cutting cycle, valuations remain a “significant headwind” for medium- to long-term returns.
“Looking back over 150 years, the contrast is stark: when valuations are high, forward returns are consistently weak,” Deutsche Bank analysts wrote.
They noted that from the last three major valuation peaks, 10-year real total returns were negative, “a striking outcome given that U.S. equities have historically delivered around 7% annualised real returns.”
By contrast, when valuations were low, the following decade produced “extraordinary” returns.
The bank highlighted that much of today’s elevated market levels are being driven by the so-called “Mag-7” tech stocks and the central role of artificial intelligence in the U.S. equity narrative.
“The current setup underscores how central AI has become to the U.S. equity story,” Deutsche Bank said.
For investors who believe this represents a true paradigm shift, long-term returns “could still be constructive.” But, the bank added, “you are taking a big position beyond what has already been 150 years of U.S. equity market dominance.”
Deutsche Bank also drew a distinction with past bubbles. “A key distinction versus the 2000 bubble is that today’s valuation extremes are largely concentrated in the U.S.,” analysts wrote.
Other G7 equity markets sit at more moderate valuation levels, but they “lack the same AI exposure that makes the U.S. narrative so compelling to many.”
The bank concluded that unless “this time truly proves to be different,” lofty valuations will likely weigh on long-term equity performance.