A dark thought is starting to circulate around Wall Street. What if, after years of stellar gains, the US stock market is basically flat for the next decade?
That feels like an unbelievable idea given the current bull run for the stock market, which is just the latest in a larger secular rally that’s been going on for almost 15 years.
The gains continued to pile up on Thursday. As investors fled tech amid worries about Oracle’s earnings, they pumped the benchmark S&P 500 and the Dow to fresh record highs.
But the possibility of the party soon coming to an end is being floated by a growing number of forecasters, who see two main reasons the market could be held back:
- Valuations: Stocks are historically expensive. The S&P 500 currently trades at a price-to-earnings ratio of around 27, above the 5-year average range of 19.5-25.4, according to an analysis from World PE Ratio.
Other valuation measures, like the Warren Buffett Indicator, have also recently suggested that stocks are overvalued.
- An aging bull market. Stocks have been on an amazing run-up over the last few years. The S&P 500 is up more than 90% from its low in 2022, around the time stocks began to climb out of bear market territory. Moreover, stocks have been in a larger secular bull market since the economy climbed out of the depths of the Great Financial Crisis around 2009.
Now, more analysts see what could be a lost decade coming for stocks — a 10-year period where the US market sees near-zero returns or severely lags other markets around the world.
In a note this week, Bank of America said its team of equity strategists saw the S&P 500 shedding 0.1% over the next decade. Historically, that’s a terrible performance, given that the S&P 500 has gained an average 10.5% a year since the 1950s.
Strategists pointed to high valuations and back-to-back years of double-digit growth in the benchmark index.
“Even for next year, the math of history is tough: average returns for the S&P 500 after 3 years of >15% growth are 2.3ppt lower than the average annual return. Investors may need GDP & EPS surprises to avoid a seventh ‘lost decade,'” BofA wrote in a client note.
Torsten Sløk, the chief economist at Apollo, also said he expects the S&P 500 to remain relatively flat for the next 10 years. That projection is based on where the forward price-to-earnings ratio of the S&P 500 currently resides, he said on Thursday.
Given the S&P 500’s forward P/E ratio, the index is expected to remain about flat over the next 10 years, Apollo said.
Bloomberg/Apollo Chief Economist
“The historical relationship between the S&P 500 forward P/E ratio and subsequent 10-year annualized returns shows that investors should expect to get zero in return in the S&P 500 over the coming decade,” Sløk said.
In November, Goldman Sachs analysts said they saw the US market coming in last place for returns in the coming 10-year stretch. The S&P 500 is on track to gain around 6.5% a year for the next 10 years, the bank estimated, falling short of estimated returns in Europe, Japan, Asia, and emerging markets.
The bank said it expected earnings growth to be stronger in other markets. Valuations in the US are also high and on track to decline around 1% annually over the next decade, per Goldman’s analysis.
“If the profitability and/or valuations of the largest companies falter, unless another cohort of ‘superstars’ emerges, returns for the broad market will likely be hampered as today’s largest stocks fall back to earth,” analysts wrote of their bearish scenario for the US market.
