Windfactor Investment Research

    • The Windfactor Report: January 2026
      by Nathan Tidd

      Continued Valuation Headwinds for US Equities

      The trailing P/E for the S&P 500 Index is currently 26.2, a decline from last month’s 26.85 due to a flat December market and higher current earnings (per S&P Global). Despite the mild improvement, this month’s reading remains higher than 86% of periods since 1984. Similar valuation levels have historically translated into headwinds for US stock returns.

      Historical periods with starting valuations similar to today include select months during 1998, 2000/01, 2003, 2020/21, and 2024/25. Analysis of total returns from these “best-match” periods shows the following:

      1. The index rose an average of 8% over the subsequent year but only an annualized average of 5% over the next three years. For comparison, since 1988 the index’s average total return over those time horizons has been 12% and 11% per year, respectively.
      2. The index fell over the next year during more than 35% of best-match periods and was lower after three years in up to 29%. Notably, 37% of all negative 3-year outcomes observed since 1988 had a starting P/E within 10% of the current value, despite the relatively small number of best-match periods included in the analysis(~18%).
      3. While some best-match periods saw exceptional returns (30%/yr or more) over one year, the highest 3-yr return was a constrained 17% per year. Compare these figures with 56% and 33%/year when starting valuations were lower.
      4. On the low side, one close comparable period (Oct 2000) saw annualized 3-yr returns of -8%. For reference, the worst 3-year period spanning the 2008 financial crisis (June 2007 – June 2010) was only slightly higher at -10%/yr.

      Exact results depend on how closely we match today’s trailing P/E to past values. The following table shows analysis for periods with starting P/E within 3%, 5%, and 10% of today. The story appears consistent at all levels.

      Disclaimer:

      This report is 100% historical fact and does not constitute investment advice. None of the information should be interpreted as a recommendation to buy, hold, or sell any investment security.

      As the saying goes, past performance is not a determinant of future returns. The next 1-3 years may or may not fall within historical ranges. Differences in index asset composition, monetary policy, inflation, and numerous other factors will all play a role in corporate results that drive index dividend returns and investor decisions that drive price returns.

      Methodology Note:

      To smooth historical spikes in P/E measures during economic downturns, Windfactor overlays an earnings recovery model based on the latest (then-reported) revenue figures and pre-downturn profitability rates. This allows for better matching of historical periods based on forward earnings potential without relying on noncomparable analyst estimates.

      Sources:

      S&P Global Indices, Yahoo Finance

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