What You Need To Know About Future Market Returns | The Mesh Report

What You Need To Know About Future Market Returns

Dividend Sensei June 7, 2021 Comments Off on What You Need To Know About Future Market Returns

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.

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