That reality is obscured by arguments about whether and to what extent stocks are too expensive. But even by the most flattering measures, such as price-to-earnings ratios using analysts’ rosy earnings projections, U.S. stocks are not cheap. And according to more conservative P/E ratios that use current earnings or a trailing average of recent years’ earnings, stocks are as pricey as they were in the late 1920s and roughly 40 percent more expensive than in the late 1960s.
That’s why there’s near universal agreement that returns will be lower going forward. Even Wall Street, which rarely lacks enthusiasm for stocks, concedes as much. BNY Mellon and BlackRock estimate that the total return from U.S. stocks will be roughly 6 percent a year over the next 10 years, before inflation, or close to half the S&P 500’s return of 10 percent a year since 1926. JPMorgan estimates that the long-term return from U.S. large-cap stocks will be closer to 5 percent. I suspect the number will prove to be even lower.
That doesn’t mean investors should dump all their U.S. stocks, but it’s useful to have realistic expectations about what’s likely ahead. It may temper investors’ urge to take more risk than they can afford or skimp on saving in the hope that the market will bail them out, or simply prevent surprises that could lead to bad investment decisions down the road.
So while bulls and bears bicker about the market’s path, it’s worth remembering that there’s little disagreement about where it’s likely to end up, which, after all, is the only thing worth talking about.
This article provided by Bloomberg News.