My First Million
Howard Marks: The S&P500 Is a Bad Bet Right Now
Episode Summary
AI-generated · Mar 2026AI-generated summary — may contain inaccuracies. Not a substitute for the full episode or professional advice.
This episode of My First Million features investor Howard Marks, who presents a cautious outlook on investing in the S&P 500 at its current valuation. Marks introduces a JP Morgan chart from late 2024 that illustrates a negative correlation between the S&P 500's price-to-earnings (PE) ratio at the time of purchase and the subsequent 10-year return, meaning higher PEs historically lead to lower future returns. He asserts this relationship makes perfect sense in investment theory.
Marks emphasizes a critical historical finding from the chart: if the S&P 500 was bought when its PE ratio was 23, in every single instance, the annualized return over the following decade fell strictly between positive two and negative two percent. This statistic, according to Marks, is all an investor needs to know about the current S&P 500 environment.
He further challenges a common perception about the S&P 500, which has averaged a 10% annual return over the last 100 years. Marks points out that despite this impressive average, the actual annual return for the S&P 500 is almost never between 8% and 12%, suggesting that relying on the long-term average can be misleading without understanding the underlying volatility and valuation context.
Listeners will walk away with a nuanced, data-backed perspective on S&P 500 investment, particularly on the risks associated with high PE ratios, and a more critical understanding of historical market averages.
👤 Who Should Listen
- Long-term investors considering S&P 500 index funds
- Individuals interested in market valuation and its impact on future returns
- Financial advisors and wealth managers assessing current market conditions
- Anyone re-evaluating their passive investment strategies
- Listeners curious about the nuances of historical market performance data
🔑 Key Takeaways
- 1.A JP Morgan chart from late 2024 shows a negative correlation between the S&P 500's PE ratio at purchase and its subsequent 10-year annualized return.
- 2.Historically, buying the S&P 500 when its PE ratio was 23 resulted in a 10-year annualized return between -2% and 2% without exception.
- 3.Howard Marks argues that this historical data on a PE ratio of 23 is crucial information for understanding current S&P 500 investment prospects.
- 4.Despite the S&P 500's 100-year average annual return of 10%, its actual annual return is rarely within the 8-12% range, highlighting volatility and the potential for misleading averages.
💡 Key Concepts Explained
PE Ratio and Future Returns
This concept highlights the historical inverse relationship between the S&P 500's price-to-earnings (PE) ratio at the time of investment and the annualized return over the subsequent 10 years. The episode presents a JP Morgan chart illustrating that higher PE ratios at purchase correlate with lower future returns, implying that valuation significantly impacts long-term investment outcomes.
S&P 500 Historical Performance Misconceptions
This concept addresses the common misunderstanding of the S&P 500's long-term average annual return. While the index has averaged 10% per year over 100 years, the episode points out that actual annual returns rarely fall within a narrow band around this average, suggesting that relying solely on the mean can be misleading about the market's year-to-year volatility and specific periods of performance.
⚡ Actionable Takeaways
- →Consult historical data and valuation metrics like the PE ratio before making long-term investment decisions in broad market indices like the S&P 500.
- →Consider the potential for significantly lower 10-year annualized returns if investing in the S&P 500 when its PE ratio is high, specifically around 23.
- →Look beyond the average historical returns of market indices and analyze the distribution and range of annual returns to gauge risk and potential outcomes.
- →Investigate the current PE ratio of the S&P 500 to inform your expectations for future investment performance.
⏱ Timeline Breakdown
💬 Notable Quotes
“"if you bought the S&P when the PE ratio was 23 in every case there were no exceptions. your annualized return over the next 10 years was between two and minus two."”
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Howard Marks
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