Returns May Be Low, but Equities Should Outperform
So where does all of this leave investors? The outlook for capital market returns over the next decade is largely a function of the starting point. Following a 30+ year decline in global bond yields, virtually all assets are expensive today by historical standards. For long-term investors, the implication is that prospective real and nominal returns will be low by historical standards, and the trade-off between risk and reward will be comparatively disappointing.
U.S. equity prices have recently advanced and are now approaching all-time highs. For stocks to make significant gains from here, we think it would require improving profit trends rather than multiple expansion. We continue to hope for profit improvements in the second half of 2016, but worry that the U.S. will disappoint as the corporate sector retrenches in response to the earnings contraction. Nevertheless, we think corporate profits can improve modestly as long as the U.S. avoids recession.
More to the point, equity markets appear more attractive than other asset classes. The current dividend yield of the S&P 500 Index is 2.2% (compared to less than 1.4% for the 10-year Treasury).2 Furthermore, nearly two-thirds of S&P 500 companies yield more than the 10-year Treasury, while close to half yield more than the 30-year Treasury.2 These are relatively bullish signals for equities. In other words, equities gains may be rocky, but the stock market is likely to lead this slow-moving parade.
1Source: Labor Department
2Source: FactSet
Bob Doll is chief equity strategist at Nuveen Asset Management.