John Hussman’s excellent Weekly Market Comment for the week beginning September 6 has a superb chart showing the 10-year returns to the S&P500 implied by its present level. The news is sobering. John estimates returns for the coming decade of less than 6% per annum:
Though we use a variety of methods, the consensus estimate is at about 5.6% annually. I’ve detailed our estimation methodology in numerous weekly comments over the years. Below is a chart taking this analysis back to 1928. It would be nice, before quoting alternative valuation models, if Wall Street analysts would at least present similarly broad historical evidence that their methodology actually has a relationship with subsequent market returns. If a valuation opinion doesn’t come with extensive historical evidence, it’s noise.
Worse, the returns above are nominal returns. On an inflation-adjusted basis, John forecasts returns of just 1% per annum:
That said, one thing that does concern me about the foregoing model is that our “real” inflation-adjusted version projects a 10-year real total return for the S&P 500 of just over 1% annually. That suggests that about 4% of the nominal return projection represents implied inflation, which would be consistent with post-war U.S. history, but may or may not be accurate in this instance. My guess is that, in fact, we will observe significant CPI inflation in the latter half of this decade. Still, it is worth noting that our projection for real10-year returns is not compelling in any case. 10-year real returns for the S&P 500 have been predictably negative since 1998, but it is unfortunate that except for a few weeks in early 2009, we have not yet achieved a level of valuation from which we can expect a meaningfully different result.
John concludes:
To the extent that investors wish to compare our 5.6% estimate for 10-year S&P 500 total returns with the 2.7% yield on 10-year Treasuries, it is important to recognize that the higher 10-year expected return in the S&P 500 comes with a several-fold increase in risk, particularly over a shorter horizon. Moreover, the divergence between the two figures tends to expand, not contract, during economic downturns. Stocks are not cheap, and to the extent they may outperform bonds over the next 10 years, it will most likely be with extreme discomfort.
Greenbackd 
The stock market is a cross-section of actual, honest-to-god businesses. Over the long term, its performance or over/undervaluation reflects Corporate America’s financial performance. Run the old Gordon Growth Formula as a sanity check on the projected 5.6% return.
The S&P’s earnings yield is 7-8%, several points over 10-year treasuries – even before the effect of earnings growth (which tends to happen over the long term as the world economy grows). Hussman’s projection is around half what market fundamentals would suggest (in an ex ante sense at least). Unless you believe WWIII or a prolonged depression is imminent, it’s hard to believe stocks aren’t cheap.
I’m not sure Hussman’s chart proves anything at all, except that interest rates, risk premia and actual returns can vary over time – hardly a profound realization. But in one sense I hope he’s right: it means the deals get even better.
LikeLike