High probability that stocks beat bonds and inflation during the next decade
The past decade has been dismal for US equities. We expect better returns over the next 10 years.
Ten-year annualized returns averaged 9% since 1880, but during the last decade S&P 500 delivered
an annualized return of less than 5%. We expect a solid but below-average return through 2022.
We forecast S&P 500 will deliver an average annualized total return of 8% during the next 10 years.
Distributions best describe the potential paths of the market and reflect the uncertainty inherent in
forecasting the future. Returns of 4%-12% capture one standard deviation around our mean estimate.
Our equity return forecast combined with the current record low 1.4% US Treasury yield suggests
stocks have a greater than 95% likelihood of outperforming bonds over the next decade.
We use four approaches to estimate future S&P 500 returns: (1) Historical returns;
(2) valuation at investment; (3) economic modeling; and (4) dividend yield and growth.
Individual and institutional sponsorship of the US stock market continues to erode. Volatile market
swings since 2008 have sparked mutual fund outflow and retirement fund re-allocation. Many
investors have soured on stocks and the media has once again declared the “Death of Equities.”
We believe this pessimism comes at precisely the wrong time. US companies are in terrific shape.
Balance sheets are strong; margins and earnings at record levels; ROE close to an all-time high.
But path matters, and our near-term forecast for US stocks remains cautious. A stagnating economy,
a static multiple, and minimal EPS growth support our year-end 2012 S&P 500 price target of 1250.
Investors with long horizons and tolerance for volatility should raise equity allocations.
Many pension funds should also lower their expected returns on overall plan assets.