It’s a good thing valuations and market concentration aren’t reliable predictors of near-term equity market performance because if they were… [insert ominous music]

I’ve been over this a hundred times if I’ve been over it once, which is to say I readily acknowledge having ventured into ad nauseam territory on this particular topic (and a lot of other topics besides). But this is an important point, and as such I don’t mind belaboring it.

Not a day goes by (and certainly not a week) when someone, somewhere, doesn’t point to stretched multiples for US equities and/or the swollen market caps of the largest index constituents on the way to making a dire prediction about forward returns.

Sometimes, those predictions aren’t presented as such but the implication’s always the same: Rich multiples and poor breadth are together an augury of stock corrections.

The truth is, there’s no truth to that. Not really, anyway. If your business is trading, you’re not especially likely to do any better than average using multiples and breadth metrics as market timing signals.

However… HOWEVER. Over long investment horizons, valuations are pretty much all that matters. If you buy when valuations are stretched, you’re stacking the deck against yourself when it comes to long-term returns. That doesn’t necessarily mean your returns will be negative, it just means habitually buying when stocks are rich is a guaranteed way to underperform a simple dollar-cost averaging strategy.

With all of that in mind, I wanted to present the following updated charts from Goldman.

The figure on left gives you a sense of how the current forward multiple for US majors compares to history. The figure on the right shows you where we are in terms of top-10 dominance.

Simply put: We’re in unprecedented territory. At nearly 23x, the S&P has virtually never traded this rich. And at 40% of the index, the top 10 names have never been anywhere near as important as they are currently.

To reiterate, using those sorts of metrics to time the market is generally a bad idea, but… well, you get the idea.

“We expect earnings will be the main driver of returns [going forward], as today’s high valuations already embed an optimistic economic and fundamental outlook,” Goldman’s David Kostin remarked.

Considering the S&P’s multiple ranks 96%ile on a 45-year lookback, I’d call that an understatement. As JonesTrading’s Mike O’Rourke put it on Monday evening, “the market’s animal spirits are more than alive and well; they are as frenzied as ever.”