US Equities: Maybe All The Forecasts Will Be Wrong?

by Corey Philip //  January 23, 2018

US equities have been on a bull run for the last 8 years.  The  S & P 500 TR Index is up over 270% in the last 8 years 13.64% annually and the CAPE Ratio (price to earnings ratio adjusted for inflation) reflects the valuation increases at currently at 32.01.  That’s nearly double its average and higher than it was at the peak before the 08/09 recession.  So US stocks are high priced and have been on a bull run for years.

They’ve got to come down.  Its got to end.

Foreign stock markets on the other end, are a total value when compared to the US.  Developed Europe has a CAPE Ratio of 18.6 and emerging markets have a CAPE 16.5.

Besides providing a relative value metric, the CAPE Ratio has some forecasting power.  It’s been found to have a 70-80% correlation with 10 yr forward returns.  In other words, what is cheap today will have higher growth over the next 10 years (usually).  Nearly all of the leading brokerage and research firms us this metric (actually they probably use a much more complicated formula but it doesn’t do any better — simpler wins) in making their long term outlooks and forecasting.

Based on the current data… everyone project poor returns from US equities for the next 10 years (note I didn’t say a crash).

Our estimates show that, over the next 10 years, stocks and bonds will likely fall short of their annualized returns from 1970 to 2016.
According to Schwab
The ten-year outlook for global equities has deteriorated since last year and is now centered in the 4.5%–6.5%
From Vanguard

And then of course is Research Affiliates Interactive Asset Allocation tool which estimates US Equities returning (nomina termsl) 2.5%, with emerging markets returning over 8%

US equities

No matter where you look on wall street the general expectations are US equities aren’t going to do well for the next 10 years. But as is often the case, when everyone agree’s, usually things are wrong.  What if there’s something in the bigger picture that we’re all missing?  What if the next 10 years are great?

That would be a blessing a for all the investors piling into small cap funds with the smart beta craze.  The current CAPE of small caps is up in the 40s.

About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}