This was inspired by Greenblatt's comment about one-year forward expected returns in the market based on P/E level. While bears are always telling us how overvalued the stock market is, Greeenblatt seems to always come up with a positive one-year forward expected return. He uses data from the past 30 years to calcluate this, but I was worried that this time period might be a little biased due to the large and persistent decline in interest rates for this period. So I decided to look at this myself over a longer time period.

Note: 1991.12 is December of 1991, the P/E is the P/E or CAPE10 at that time, and the return is the total return over the following 12 months.
Data source: Shiller




The data excludes total return for 2016, but we know it was more than 11%, so the results would be even stronger.

What happens if we do the above with a 25x P/E threshold?

All Months, not just year-end
Just to be thorough, I reran all of the above using all months, not just year-end.  I looked at all months where the P/E ratio was over 20x or 25x and what the total return was 12 months later.


Using CAPE10
Someone pointed out that CAPE10 might be more interesting to look at for this analysis as some years like 2008 show high P/E's due to depressed earnings (even though depressed earnings will push up CAPE10 too). Here are the results:

Using CAPE10, All Months