What You Need To Know About Future Market Returns

What You Need To Know About Future Market Returns

Posted On June 7, 2021 3:06 am

Let’s start with this…

How 10.5% compound annual growth rate (CAGR) inflation-adjusted annual returns over the last decade are far above the market’s historical norm.

(Source: Ben Carlson)

The market’s real returns are generally stable at 6.5%-7.5% CAGR over time, meaning about 8.5%-9.5% in nominal terms using long-term 2% inflation expectations.

(Source: FAST Graphs, FactSet Research)

The incredible bull market of the last decade is due mainly to multiple expansion. Stocks are now trading at their highest blended price-to-earnings (P/E) ratio in 20 years and their second-highest in history.

(Source: FAST Graphs, FactSet Research)

That bodes rather poorly for short- to medium-term returns.

In fact, analysts expect about 5.9% CAGR real returns from the S&P 500 over the next 30+ years. That’s 16% less than its historical annual post-inflation returns.

Fortunately, there is good and bad news for long-term stock investors, especially the kind that invest primarily in index funds.

(Source: FAST Graphs, FactSet Research)

According to JPMorgan Asset Management, there’s a 50% probability that the market’s future fair value blended P/E will be about 18.5, rather than the 17.3 mid-range we’ve seen over the last 10-20 years.

Ten- to 20-year timeframes are 90%-91% statistically significant. Assuming relatively similar economic, interest rate, and earnings growth fundamentals, the 10- to 20-year average multiple approximates intrinsic value.

The 17.2 average blended P/E of the last decade includes:

  • Average 2.4% 10-year U.S. Treasury yields (blue-chip economists’ consensus average forecast for the 2020s is 2%-3%)
  • More aggressive monetary policy from the Fed
  • Aggressive corporate buybacks.

So why might the future fair value P/E for stocks rise to 18.5? Because, according to Ben Carlson of Ritholtz Wealth Management, the pandemic may have permanently reduced the risk of severe recessions.

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About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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