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Quarry Hill Quarterly Review: Historic Valuations and the Power of Diversification

Q3 2025 is in the books...
 
“With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future.”
- Carlos Slim Helú
 

Investment outlook

Watch our latest quarterly review video for a comprehensive analysis on historic valuations and the power of diversity

Congratulations, we made it! We've reached the end of another quarter with strong investment returns. But there's something important you should know: The U.S. stock market is now at the third most expensive level in history. The previous two times were 1929 (Great Depression) and 1999 (tech bubble).

Before you panic…this doesn't mean a crash is imminent. But it does provide important context for what to expect and why diversification matters more than ever.

 

Understanding Today's Valuations

QH Q3 Review Video Slides (1)

This chart shows the Schiller price-to-earnings ratio, which averages earnings over 10 years. You can see spikes in 1929, 1999, and today at similar levels.

QH Q3 Review Video Slides (2)

When valuations are this high, historical data suggests S&P 500 returns over the next five years will likely be in the single digits—probably around 5% per year, well below the historical average.

 

The Concentration Problem

Most people think the S&P 500 divides money equally across 500 companies. It doesn't.


QH Q3 Review Video Slides (7)

The S&P 500 is weighted by market capitalization. Right now, the top 10 stocks represent approximately 40% of the entire index. When you invest in the S&P 500, 40% goes into just 10 companies: NVIDIA, Apple, Amazon, Microsoft, Google, and a few others.

We've never had the S&P 500 be so concentrated in so few names.

 

Why We Don't Try to Time the Market

QH Q3 Review Video Slides (1)

If you look at this valuation chart historically, stocks became permanently more expensive starting around 1995. If you had used valuations to time the market, you would have been sitting on the sidelines since 1995—missing decades of returns.

Valuation is useful for setting expectations, but it's a terrible tool for market timing.

 

The Power of Diversification

Here's the good news: We don't need to time the market because we diversify beyond U.S. large-cap stocks.

Quarry Hill client portfolios include:

  • Bonds
  • International stocks (developed and emerging markets)
  • Real estate
  • Small value stocks

All of these have much more reasonable valuations right now.

 

International Opportunities

QH Q3 Review Video Slides (3)

While U.S. stocks have become increasingly expensive, international stocks have remained at historically cheap levels. International valuations haven't meaningfully increased since 2008, even as U.S. valuations soared.

At Quarry Hill, we use global market cap weighting—about 60% U.S. stocks and 40% international. We're not overweighting the most expensive market in the world.

 

The Small Value Advantage

QH Q3 Review Video Slides (4)

While U.S. large-cap stocks are extremely expensive, small value stocks are trading at normal historical valuations. This is why our portfolios tilt toward small cap value—we're leaning away from expensive areas toward historically higher-returning assets with better valuations.

 

What History Teaches Us

QH Q3 Review Video Slides (5)

This chart shows what happened starting January 1, 2000—the tech bubble burst. An S&P 500 investor lost almost 44% by October 2000. After five years, their cumulative return was -11% (averaging -2% per year).

A diversified index portfolio with a small value tilt achieved a positive return of 55% over those five years—9% per year after all fees, including our 1% advisory fee.

A well-diversified portfolio did just fine through the tech bubble.

 

Our Current Positioning

How are we positioning Quarry Hill portfolios today?

  1. Global diversification: Global market cap weighting, not overweighting expensive U.S. stocks
  2. Small value tilt: Overweighting small cap value at normal valuations
  3. High-quality focus: Tilting toward high-quality, profitable companies
  4. Strategic funds: Using Dimensional and Avantis funds
  5. Disciplined rebalancing: Systematically selling expensive assets, buying cheap ones

 

The Bottom Line

The U.S. market is expensive and concentrated—but don't try to time it. You'd have been out since 1995.

Diversification is your protection—spreading across international markets, small value stocks, and bonds lets us lean away from expensive areas without risky all-or-nothing bets.

Our clients are positioned differently—with better valuations in international and small value stocks.

History shows diversification works—even during extreme valuation bubbles.

Discipline drives returns—not predictions, but adherence to research-based strategy.

 

What This Means for You

We're invested alongside you. You can't predict the future, but you can prepare for it:

  • Stay diversified across asset classes and geographies
  • Maintain appropriate risk levels for your timeline
  • Avoid chasing recent performance
  • Trust the historical evidence

If you have questions about how these market conditions affect your situation, please reach out. We're here to help you navigate whatever the markets bring.

-A note from Bjorn Amundson, CFP®

This material is intended for educational purposes only. You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. Nothing contained in the material constitutes a recommendation for purchase or sale of any security, investment advisory services or tax advice. The information and opinions expressed in the linked articles are from third parties, and while they are deemed reliable, we cannot guarantee their accuracy.