Since the Global Financial Crisis, U.S. equities have experienced a historic run. From the market bottom in March 2009, the S&P 500 has delivered cumulative returns exceeding 1,200%.

However, these gains have not been driven solely by underlying earnings growth. In fact, a significant portion of the market’s appreciation has come from valuation expansion, investors willing to pay higher prices for each dollar of earnings. Over the past 30 years, the market’s average price-to-earning (P/E) ratio has been around 17x, falling below 10x during the crisis, but today it sits closer to 21x.

What’s driving higher valuations?

A primary factor has been monetary policy from the Federal Reserve.

• Short-term interest rates were held at historically low levels for an extended period
• Lower rates reduce the discount rate applied to future earnings, increasing present valuations
• The Fed also implemented Quantitative Easing (QE), significantly expanding its balance sheet and increasing liquidity in the financial system

The combination of low yields in fixed income and abundant liquidity pushed investors toward equities, effectively supporting higher valuations and reinforcing the perception of the Fed as a market backstop.

Since the Global Financial Crisis, U.S. equities have experienced a historic run. From the market bottom in March 2009, the S&P 500 has delivered cumulative returns exceeding 1,200%.

However, these gains have not been driven solely by underlying earnings growth. In fact, a significant portion of the market’s appreciation has come from valuation expansion, investors willing to pay higher prices for each dollar of earnings. Over the past 30 years, the market’s average price-to-earning (P/E) ratio has been around 17x, falling below 10x during the crisis, but today it sits closer to 21x.

What’s driving higher valuations?

A primary factor has been monetary policy from the Federal Reserve.

• Short-term interest rates were held at historically low levels for an extended period
• Lower rates reduce the discount rate applied to future earnings, increasing present valuations
• The Fed also implemented Quantitative Easing (QE), significantly expanding its balance sheet and increasing liquidity in the financial system

The combination of low yields in fixed income and abundant liquidity pushed investors toward equities, effectively supporting higher valuations and reinforcing the perception of the Fed as a market backstop.