Wall Street’s strategists get paid tons of money to quibble over what stocks might do over the next year.
But most investors have longer-term time horizons to consider.
Today, the analysts at Societe Generale update their 10-year outlook for the global stock markets.
In brief, they don’t think investors should be anticipating the double-digit annual returns of the recent past.
“US equities face three headwinds: cyclically-adjusted valuations (CAPE, starting date 1881) have returned to very expensive territory, corporate margins stand at historically high levels, and after already five years of growth from the 2009 trough, we estimate that the probability of another recession kicking in is close to 100% within the forecast timeframe (the longest cycle ever was 120 months, or 10 years),” they write. “But US equities have supports as well, such as impressively strong balance sheets and the beginning of a new M&A cycle, backed by a highly reactive central bank.”
For the U.S., their baseline scenario assumes the S&P 500 gets to 2,500 by 2024, which represents a meager 3% growth per year.
“Our central scenario projects moderated underlying economic growth of 5% per year over the next few years, i.e. below the long-term growth trend (8.6%),” they elaborated. “We have also adopted a scenario whereby inflation will gradually increase at 1a00m0odest rate, until it pushes down the normalised 10-year moving P/E rate slightly, to below its long-term average of 20x.”
The 40-page report goes into a decent amount of depth and considers various scenarios. Their best-case and worst-case scenarios offer some interesting alternative glimpses into the future.
- Best-Case (S&P 500 reaches 4,000, 8% annual growth): “In a high inflation scenario, two opposing forces go head to head: on the one hand, inflation prompts an acceleration in (nominal) reported corporate profits and, on the other, it reduces equity valuations. The combined forces would be likely to have a positive impact on equity markets (+2%). In this scenario, while nominal returns are positive, real returns would be eaten up by inflation.”
- Worst-Case (S&P 500 tumbles to 500, 12% annual declines): “We have no doubt that a deflation scenario, like that of the 1930s in the US, would considerably damage corporate profits and the equity market valuation, eventually impacting the equity markets themselves. We saw this in Japan between 1995 and 2005, when the collapse in listed Japanese company ROEs severely cut into their equity valuations and thus the Nikkei index. We believe such a scenario would put the S&P 500 at 500 points in 10 years (-12% p.a.).”
As you can see, even in their best-case scenario, they only see single-digit annual gains.