Where should the S & P 500 survive for a decade?

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the
S & P 500 Index
fell below the 3000 mark on Friday, and the debate on its future direction is so fragmented that forecasts differ radically, even between two strategists from the same company.

Bernsteinof the Inigo Fraser-Jenkins sees the S & P 500 in a range of around 4,000 in 10 years, while his colleague Alla Harmsworth is much more optimistic, predicting a range close to 8000.

The benchmark has gained 19.6% so far this year. Federal Reserve rate cuts have helped the market overcome concerns over continued trade tensions between the United States and China.

The index is currently trading at 22.31 times earnings a year, compared to its average of 15.76. The highest price-earnings ratio in the index was just over 10 years ago at 123.73 in May 2009.

In a note to clients last week, Fraser-Jenkins wrote that stocks, as well as many other asset classes, seem expensive, with yields declining for 35 years. He notes that the Shiller ratio – in which the price is divided by the adjusted 10-year inflation benefit – is around 29, which seems to indicate a yield of 3.4%, including dividends, for each year of the next decade.

While it is not an effective way to evaluate short-term returns, he called Shiller's P / E "the best thing we can do" to predict 10-year returns.

"It may sound horrible compared to what investors have been used to for 30 years, but we would argue that it is not at all bearish," he wrote. "After all, this will likely translate into a positive return in real terms, which is probably higher than almost any other asset class that can be bought on a large scale."

He argues that the P / E Shiller and Tobin's Q, the price of which is divided by the replacement cost of assets, indicate that US equities are fully valued.

Harmsworth points out that the Shiller P / E series has shown returns of less than 10% for most of the last 10 years. In fact, the market has yielded about 250%, including dividends.

Monetary or fiscal policy may cancel the Shiller P / E model signals, argues Harmsworth. And given the potential threat to pension systems, politicians will be strongly motivated to continue making statements.

Fraser-Jenkins' lower return prospects are also attributable to the fact that household capital allocations may have peaked. Harmsworth meters may not be important given the state of share buybacks by companies, in which "the purchase of shares by companies was ten times greater than the sale of shares. 'shares by investors'.

Fraser-Jenkins proposes a simple model for real long-term equity return: dividend yield plus real per capita growth plus population growth. According to this model, the expected real return of equities would be 3.4%. If you take into account the so-called redemption yield in the United States, that percentage can be as high as 5.6%. He is also concerned about the geopolitical risk to equities, given that the last 10 years have been characterized by quantitative easing.

"Without expansion of profits, the rate of growth of corporate profits is equal to the growth rate of the economy and the term of benefit sharing escapes," he writes. "Similarly, in the long run, we have trouble claiming that there should be an almost permanent evolution in the market multiple."

Harmsworth argues that stocks are "the best long-term protection against inflation".

"Gold is often seen as a hedge against inflation, [but] this is only true to the extent that it can outperform other assets in times of inflation, writes Harmsworth. "In the long run, the real return is close to zero. Stocks have long been better protection against inflation. "

Even though Fraser-Jenkins is right about future market returns, Bernstein concludes that investors could not choose better options than equities for investors who want to invest in their future, whether it's for retirement, education or health.

"So, even though returns may not be as high in the next 10 years as in the last 40 years, we need a long exposure to equities, which is the best hedge against the dollar." Inflation in the city, "concludes the note.

Write to Connor Smith at [email protected]