Experts are predicting lower returns for U.S. stocks and higher returns for emerging markets, according to a recent article by William Baldwin. These predictions are based on capital market assumptions made by big financial institutions. While there is some agreement among experts regarding emerging markets, junk bonds, and inflation, there is a wide range of opinions when it comes to U.S. stocks.
The article emphasizes the importance of understanding what is meant by an expectation. It is not a specific prediction, but rather the midpoint of a bell curve of probabilities. The purpose of these expectations is to help individuals make long-term plans rather than trying to time the market.
The most significant revelations in the article are about potential returns from stocks. Many investors may expect the same high returns seen in the past decade, but this may not be realistic. The market’s average price-to-earnings ratio has reached an unusually high level, contributing to the high returns. To repeat these returns in the future, earnings would have to increase at an unlikely rate and prices would have to reach unprecedented levels.
The article provides a sampling of Wall Street forecasts for U.S. stocks, high-grade bonds, inflation, junk bonds, and emerging markets. These forecasts vary in their time horizons and assumptions. For U.S. stocks, there is a range of opinions, with some experts projecting modest returns and others predicting a decline in stock prices.
When it comes to high-grade bonds, Fidelity’s long-term forecast aligns with the known return on inflation-protected Treasuries over a 20-year period. Other firms provide forecasts for nearer-term results, taking into account potential changes in inflation or real interest rates.
In terms of inflation, forecasters are in line with the bond market’s opinion, predicting average inflation between 2.4% and 2.5% over the next few decades.
For junk bonds, the expected returns are around 3.7%, taking into account coupon yields, expected capital losses, inflation, and fund overhead.
The article also highlights the potential for higher returns in emerging markets. While there are risks associated with investing in these markets, such as expropriations and runaway inflation, experts believe that growth is high and stock prices are low, making them an attractive investment opportunity.
The article concludes by discussing different methods for estimating future stock returns. One approach focuses on the earnings yield, which is different from the methods used by most Wall Street experts but arrives at a similar number. Using this approach, the author predicts a real total return of 3.3% per year for stocks over the next 40 years. This return is decent but significantly lower than the 8.6% average annual return seen since 1984.
The author acknowledges that his prediction of permanently high price-to-earnings ratios may be unrealistic, but he believes that Wall Street has changed and investors may be rational in accepting lower earnings yields. Ultimately, investors should not expect high returns and should be prepared for a range of outcomes.
In conclusion, experts are predicting lower returns for U.S. stocks and higher returns for emerging markets. These predictions are based on capital market assumptions and take into account factors such as price-to-earnings ratios, earnings growth, and inflation. While there is some disagreement among experts, it is important for investors to have realistic expectations and make long-term plans based on these predictions.