US Stocks Still Expected to Generate Relatively Moderate Returns for Decade Ahead vs. Recent History
By James Picerno | The Milwaukee Company
US stock market performance is on track to downshift over the next decade vs. the past ten years.
The S&P 500 is projected to earn an annualized 5%-plus in the decade ahead, based on the average of five models.
Our market forecast is roughly half of the 10%-12% annualized ten-year performance posted for US stocks since 2024.
New analysis by TMC Research highlights the case for tempering expectations for US stock market performance. The average estimate via five models we monitor has ticked down since our previous update nearly two months ago. We’re currently estimating the S&P 500 Index will generate a low-5% total return for the decade ahead, down slightly from the 5.5% point estimate in our May 6 update.
Forecasting market returns is highly uncertain, in part because every model comes with its own set of pros and cons, and the future is always unknowable. In an effort to minimize error and develop reasonable expectations, our estimate draws on five models. The average forecast for several models provides, in theory, a more robust outlook vs. the view for any one model. The average 5.3% forecast in today’s update (red line in the chart below) compares with estimates from individual models ranging from a nearly flat outlook (0.6% annualized) to roughly 7% annualized. Note that in all cases the forecasts are well below the 10%-12% range that’s prevailed for the rolling 10-year return since 2024.
Every market forecast should be viewed cautiously, but it’s striking that the mean estimate shown in the chart above is sharply lower than the annualized return posted for the S&P 500 over the past decade. The exact return outlook is a guesstimate, at best, but the fact that the average of several models is projecting a substantially lower performance offers a basis for managing expectations down relative to recent history.
It’s also useful to consider how individual estimates compare with real-world data for a sense of the market’s current implied pricing of ex ante performance relative to other investment choices. Consider, for instance, how the S&P 500’s current 3.49% earnings yield (a measure of market valuation based on inverting the price-earnings ratio) compares with the US 10-year Treasury yield, which was 4.38% at last week’s close (June 20). The earnings yield for the S&P 500 is an estimate of the return an investor would receive if all the stock market’s earnings were distributed as a dividend. On that basis, it’s telling that the risk-free 10-year Treasury note has recently been offering a higher yield vs. the S&P’s trailing earnings yield – a gap that implies that equities are highly valued, which in turn is another clue for thinking that stocks will likely generate relatively lower performance vs. recent history.
Here's a quick recap of each of the five models used to generate the forecasts above:
CAPE Ratio Model: this stock market valuation indicator, maintained by Professor Robert Shiller, is calculated using real earnings per share for the S&P 500 based on a rolling 10-year window. TMC Research uses the CAPE ratio to generate an implied return for the stock market.
Earnings Yield Model: the stock market’s implied ex ante performance is derived from the S&P 500’s earning yield, defined as the inverse of the price-to-earnings ratio.
ARIMA Model: In contrast with the two models above, which use valuation to infer future return, this estimate uses statistical analysis to generate a forecast. An autoregressive integrated moving average (ARIMA) model is a type of regression analysis that’s run on rolling window of the market’s return history to estimate future results.
Bayesian Model: This statistical model uses lags as a basis for updating so-called “prior beliefs” on a rolling basis to estimate the effects of previous effects on the S&P 500 to forecast return.
Average Historical Return Model: This naïve estimate is a simple average of all the rolling 10-year returns since 1960.