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.