Valuation Doesn’t Predict Returns. It Changes the Shape of Risk
Most investors look at valuation data and ask a single question: what happens next? That question is the trap.
Valuation doesn’t tell you what will happen. It tells you how fragile outcomes have become.
The table below, from Goldman Sachs Global Investment Research, shows forward 12-month price-to-earnings ratios by sector, ranked against each sector’s own history and relative to the S&P 500 across long-term windows.
It isn’t a forecast. It’s a map of expectations.
This table doesn’t say which sectors will rise or fall next. It shows where expectations are already elevated, in some cases near historical extremes.
When multiple sectors sit at high valuation percentiles at the same time, future outcomes become increasingly dependent on:
- Continued narrative support
- Persistent liquidity
- Trend durability
That doesn’t mean prices must fall. It means the environment becomes less forgiving.
The common mistake
Valuation is usually treated as a timing tool:
- Expensive means sell
- Cheap means buy
That framing fails because valuation doesn’t move markets. Liquidity, behavior, and trend do.
That’s why markets can stay “expensive” for years — and why valuation gets dismissed as useless when nothing immediately breaks.
The real mistake isn’t trusting valuation too much. It’s expecting it to answer the wrong question.
The first-principles correction
Valuation doesn’t predict returns. Valuation changes the distribution of outcomes.
When expectations are elevated:
- Upside becomes increasingly conditional
- Drawdowns accelerate once trends fail
- Correlations rise during stress
- Exits become crowded
Valuation doesn’t tell you when risk shows up. It tells you how asymmetric risk becomes when it does.
Is this an edge?
By itself, no.
Valuation alone isn’t an edge because it has no timing and no structure.
But used correctly, this table becomes powerful. It highlights:
- Where portfolios are most sensitive to regime shifts
- Where diversification may be more illusion than protection
- Where downside asymmetry quietly increases
It isn’t a signal. It’s a fragility indicator.
Is valuation a return driver?
Not directly — but it amplifies every other return driver.
In elevated valuation regimes:
- Trend persistence matters more
- Liquidity matters more
- Risk management matters more
Returns don’t disappear. They become path-dependent.
That’s why two people can own similar assets and experience very different outcomes — not because one predicted better, but because one engineered risk better.
The ASYMMETRY® lens
This is where most portfolios quietly fail.
The focus stays on what is owned, not how risk is structured.
In high-expectation environments, the edge doesn’t come from forecasting. It comes from:
- Predefined exits
- Position sizing that assumes failure
- Portfolio-level risk limits
- Letting upside remain open while downside is explicitly constrained
That’s how valuation becomes context instead of conviction.
Why this matters when capital has consequences
Business owners, physicians, executives, and families with meaningful capital at stake already understand this dynamic — often from outside the market.
They’ve seen:
- Businesses that looked healthy until demand softened
- Deals that worked until financing tightened
- Careers that felt secure until conditions shifted
Markets behave the same way.
The real risk isn’t volatility. It’s fragility — and fragility shows up before headlines do.
The takeaway
The Goldman Sachs valuation table doesn’t tell you what will happen next. It tells you how unforgiving the environment has become.
When expectations are elevated across sectors, compounding depends less on prediction and more on structure.
Defined downside. Open upside. Controlled portfolio risk.
That’s asymmetry.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, a registered investment adviser. He serves as portfolio manager of ASYMMETRY® Managed Portfolios, a separately managed account program with trade execution and custody provided by Goldman Sachs Custody Solutions.
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