Why are the days of double digit returns over?

[scottish]

Does anyone understand why the financial media are on about how we can only expect 4-6% long terms returns from equities?

This is popping up all over the place.     It's like a meme.   I'm wondering where it started?

[MDM]

Schiller's PE10: Cyclically adjusted price-to-earnings ratio is often cited.

Might be true, might not be true.

[scottish]

I'm not sure I understand the question...  here's what I think about everything though:

Bond yields are more than an expectation - they're guaranteed by the bond issuer.

Inflation is around 2% and hasn't changed much in the last decade.   Central banks raise interest rates when inflation starts to increase.   Interest rates have been very low since the real estate crash in the US 8 years ago, and we're starting to see growth in the economy and in inflation, so the central bank in the US has been slowly raising it's interest rate.

Stock yields are the dividends paid by the company on the stock.  Companies raise dividends when they're growing and generally do well, and usually only lower dividends when they're in deep trouble.

The S&P 500 P/E is around 25, normally it's more like 15.   When this reverts to the mean - either by price depreciation or by earnings growth- what will happen to dividends?     If it's by earnings growth, absolute dividends should tend to increase.   If it's by price depreciation, this suggests companies are not doing well, so we could expect absolute dividends to drop.

I don't see how that answers your question though.   What does it mean if a dividend yield is nominal versus real?

 

[Telecaster]

When you buy stock, you are buying a share of future earnings.  That could be returned to you as dividends, or in book value.  Really doesn't matter which.

If you buy at a low price, your upside potential is larger than if you buy at a high price. 

Right now, prices are high no matter how you slice it.  Price to book, price to sales, price to earnings, you name it, all the valuation metrics are on the high end of the scale.  Logically, that means returns going forward will be on the low end of the scale.



 

[triangle]

I think that prediction has been slowly gaining voices over time. Almost reaching a chorus of pundits singing the same tune.  Besides the bigger points already made, there are some who believe that bonds will return basically nothing or be negative (on an inflation adjusted basis) for a long while adding a drag to a balanced portfolio. Some who point to the wave of baby boomers retiring and how retirees reduce their spending which will be a drag on corporate profits. Others point to the looming public pension crisis that has been building in some places raising the likelihood of needing to sell off investments at a faster pace and ultimately reduced payouts.  I think it is too hard to predict since there are so many political & economic factors involved.

[smallstache]

This is a prediction that has been going on for decades.  It has nothing to do with bond yields, Trump, Russia, or gridlock over tax reform.

When bond yields were sky high there was talk of "The Death of Equities."  Before Trump we had 44 other presidents...you want a crazy one read about Mrs. Wilson taking over for Woodrow.  Before Russia in 2016 there was, well, Russia from 1945 to 1991.  Before Washington gridlock in 2017 there was Washington gridlock from 1789 to 2016.

None of any of this is new, just like nothing from the financial media.  It is only 24-hour cable news blabber paid for by financial companies.  The financial companies get paid by people who watch and fret.  People fret and churn holdings or hire costly advisors.

[MrSpendy]

Copying my own post from a while ago when someone asked similar question

 most of the experts are predicting lower returns on account of

1) mean reversion in valuation (valuations are above average)
2) mean reversion in long term margins (margins are well above average)
3) recent low real earnings growth continuing

EDIT:
To provide a little more color

stock returns = dividend yield + real earnings growth + inflation + P/E multiple expansion / contraction

Most long term forecasts will make some assumptions about those 4 factors. Most things that I've seen that are predicting lower rates of real return assume

a) lower real earnings growth from margin contraction, mean reversion in margins, this is the basis for GMO's 7 year forecasts on stock returns being so low for U.S. stocks

b) mean reversion to historical valuations

If neither of those happen, then real stock returns from should be roughly equal to

2% (dividend yield) + 1.7% (LT real earnings growth) = 3.7%

If valuations expand, returns will be higher. If valuations contract they'll be lower. If earnings grow faster than their historical real rate, then returns may be higher, etc.

The bottom line is that when an expert is making a long term return forecast, they are expressing some view of  what research affiliates calls the "4 fundamental building blocks of stock returns"  (dividend yield + real earnings growth + inflation + P/E multiple expansion / contraction)

Earnings growth can be broken down further into: revenue growth, EBITDA margin expansion / contraction, tax rate, leverage

P/E multiple expansion can be broken down further: bond yield & equity risk premium. You can make it as complex or as simple as you like.

https://www.researchaffiliates.com/documents/IWM_Jan_Feb_2012_Expected_Return.pdf
http://fortune.com/2011/06/12/buffett-how-inflation-swindles-the-equity-investor-fortune-classics-1977/
https://www.gmo.com/docs/default-source/public-commentary/gmo-quarterly-letter.pdf

[MrSpendy]

also, since January 1988 (bloombergs S&P 500 total return ticker stops there), the median nominal total 10 year annualized return for the S&P 500 is 8.0% and the average is 8.7%.

The 10 years ended Jan '08 - Jan '00 have astronomical 10 year rolling returns, the highest being the period ended 8/2000 (19.5%) where $1 became $6.
The 10 years ended '02 - mid '08 are more "normal" with returns in the 5-10% range.b
The 10 years ended late '08 - late 2010 have 0 to slightly negative returns, the worse being from 1999 - 2/2009 at -3.4%. $1 became $0.7 over 10 years.
more recent years are better and in the 6-8% range.

So "double digit" nominal returns are not the median or the average or the base case expectation. Instead that is something below double digits. Specifically over the past 29 years it's 8.0% and 8.7% nominal.

no one knows what will happen in the short term (or medium term). But there is reason to believe short term nominal returns will not be sustainable. That's not advocating for market timing. That's just a realistic expectation based on long term earnings growth, inflation, and multiples.

NOTE:
I found annual (Jan 1 - Dec 31) total S&P 500 nominal returns from 1927 - 2015, this shows a median 10 year return of 9.8% and average of 10.2%, but that's somewhat misleading in that there are few "normal" periods. There is the depression (negative nominal 10 year returns), the post WWII bull market (10 years ended 12/1959 =19.5% return) and early - mid 60's GoGo years (very good returns) followed by the bear market of the 1970's (nominal returns in the low single digits but negative real returns), followed by the booming 80's and 90's followed by the "lost decade" of the 2000s followed by the better more recent years. Human nature, cycles of sentiment/animal spirits, whatever you want to call it (some might say a random walk) will cause stock returns to vary from some computer-like formula of how GDP will grow, how corporate earnings power as a % of GDP will grow, etc.

The take away is that stocks earn money over time with corporate earnings power and distributed earnings (dividends). No one can tell you what they'll do for the next 1,3,5 years. On 10 year basis people can make some "reasonable" estimate based on the components of stock returns but even then, no one "knows" and actual can vary from predicted for long periods of time. 

[AdrianC]

Does anyone understand why the financial media are on about how we can only expect 4-6% long terms returns from equities?

This is popping up all over the place.     It's like a meme.   I'm wondering where it started?

As far as I can recollect this started in earnest around 2011 where the proclamations were "expect 5% nominal for the next decade".  I hope no one followed that advice in 2011 because they've missed out quite a bit.

Missed out how?

I expect lower forward returns. I think a very choppy 5-6% nominal is a reasonable expectation for a global market portfolio of stocks.

I'm 90% stocks. What else would I do? Bonds? No thanks.

[MrSpendy]

Does anyone understand why the financial media are on about how we can only expect 4-6% long terms returns from equities?

This is popping up all over the place.     It's like a meme.   I'm wondering where it started?

As far as I can recollect this started in earnest around 2011 where the proclamations were "expect 5% nominal for the next decade".  I hope no one followed that advice in 2011 because they've missed out quite a bit.

Missed out how?

I expect lower forward returns. I think a very choppy 5-6% nominal is a reasonable expectation for a global market portfolio of stocks.

I'm 90% stocks. What else would I do? Bonds? No thanks.

exactly, you can have an expectation of "lower forward nominal returns" but the equity risk premium has been and is still very much positive, something that couldn't be said of the late 1990's.

[sokoloff]

Does anyone understand why the financial media are on about how we can only expect 4-6% long terms returns from equities?This is popping up all over the place.     It's like a meme.   I'm wondering where it started?

As far as I can recollect this started in earnest around 2011 where the proclamations were "expect 5% nominal for the next decade".  I hope no one followed that advice in 2011 because they've missed out quite a bit.

Missed out how?

If I expected equities to return 5% nominal, I'd be quite content to shift a lot of my portfolio into 10-year Treasuries at 2.4%. (Because I expect higher returns over the next decade, I haven't done that, but 2.6% premium over the 10-year is not enough to push me into equities.)

[MrSpendy]

So dont lament low nominal returns.  Real wealth accumulation is quite healthy (and better than the 80s/90s) for savers, if current conditions continue.

In the 1980's and 1990's the ten year yielded an average (+4.2%) and median (+3.8%) ABOVE the most recent YoY inflation number (only using ddecember to December numbers).

Real rates are down a lot since then and I'd argue it is therefore more difficult to accumulate real wealth on a like for like basis, despite what our brokerage statements may tell us.

inflation in 1981 was 8.9%, the ten year yielded 14%. In 1991, it was 3.1%, the ten year yielded 6.7%, you could buy 10 yr TIPS in 2000 that locked in a 4.4% REAL return, for example. For 2016 CPI was 2.1% and the 10 yr yielded 2.4%. TIPS yield 0.5% real.

Assets (stocks and bonds) are priced to produce lower nominal AND real returns. For the net saver that isn't a good thing. And much of the most recent run in stocks (multiple expansion) is making that worse on a go-forward basis, but it's not like there is an alternative.

Capital is cheap. Net savers provide capital. Over the long term, all else equal (which it never is) net savers want higher prices for capital (to earn more money). But getting there would hurt, just like re-pricing to lower returns (higher earnings multiples, lower bond yields) feels good.

[sokoloff]

Assets (stocks and bonds) are priced to produce lower nominal [deleted] returns.

Agreed.

AND [lower] real returns.

Particular evidence that you have in mind for this to be true for equities? (I'm not trying to be argumentative, but I have a contrary point of view that, if invalid, I'd like to take corrective action on.)

[Eric]

The predicted lower returns for the next decade are due to every other time valuations have been this high, returns have been low.  Check out this Kitces post where he explores the correlation between CAPE and returns.

https://www.kitces.com/blog/should-equity-return-assumptions-in-retirement-projections-be-reduced-for-todays-high-shiller-cape-valuation/

[MrSpendy]

Assets (stocks and bonds) are priced to produce lower nominal [deleted] returns.

Agreed.

AND [lower] real returns.

Particular evidence that you have in mind for this to be true for equities? (I'm not trying to be argumentative, but I have a contrary point of view that, if invalid, I'd like to take corrective action on.)

well to be clear, I was (perhaps not explicitly enough) arguing against the notion that today is better than the 80's / 90's for "real wealth accumulation" and (definitely not explicitly enough) arguing that the go forward (5,10,15 yr) returns won't be as good as the most recent past (1,3,5 years).

 The "80's and 90s" is somewhat vague, but 1981/82 - 1999 is pretty much the greatest bull market ever ending in extremely high valuations for a select group of market leaders, and the "most recent past" (let's say 1,3,5, years) has been a hell of a re-rating as well. maybe that happens again/continues, maybe it doesn't; but i don't think it's the "base case".

I disagree with Pizza Steve that this is a "good" time for savers/providers of capital relative to the specific period he mentioned (80s and 90s) and relative to the context of the broader thread (why "double digits" will/won't continue). For "double digits" to continue assuming 2% inflation, that'd be 8% real which is pretty freaking high. Maybe I'm just an angry millenial longing for the 15% 30 yr bond yield of the early 80's (and corresponding single digit / low double digit PE's on blue chips). 

I don't have much more specific than that. I could make an argument based on mean reversion/inflation picking up and re-pricing bonds/stocks/etc.
 If you threw out a "I predict X% real going forward" or  something like that, I could attempt to poke holes, but we're probably not that far off in general expectations.

I'd say a "reasonable" expectation, assuming no change from multiples is 3-4% real (yield + real earnings growth) Some may come out at 0% (baking in multiple contraction over some period), some may come to 6% maybe 7% on the very high end (pointing out  history shows equities can put up those types of returns  and saying valuation bedamned). to get higher than that would be to take a pretty contrarian view and have some specific argument for pretty phenomenal returns.

What do you expect real returns going forward to be? And what do you think they have been?

[sokoloff]

What do you expect real returns going forward to be? And what do you think they have been?

I expect them, over the next 25 year period, to be in the historically consistent 7-8% (including dividend reinvestment).

I don't see the current market as wildly over-inflated, despite the recent run-up. I believe the productivity gains, largely brought about by globalism and technology, are supportive of the current valuations even though I don't expect to see the recent 3-5 year scorching market returns to continue.

[acroy]

Slowing GDP growth vs previous decades. Slowing productivity growth. May be closing in on debt-fueled growth limit despite artificially low interest rates.

Basically, economy life-cycle. the US economy is entering or already in the 'mature' stage.

[MrSpendy]

What do you expect real returns going forward to be? And what do you think they have been?

I expect them, over the next 25 year period, to be in the historically consistent 7-8% (including dividend reinvestment).

I don't see the current market as wildly over-inflated, despite the recent run-up. I believe the productivity gains, largely brought about by globalism and technology, are supportive of the current valuations even though I don't expect to see the recent 3-5 year scorching market returns to continue.

okay so we have some difference in time horizon here (valuation change matters less on a 25 year basis than it does on a 10 year basis). history (defined as 1928 - 2016) shows 25 year rolling periods do indeed have an average and median real return of 7.4% (and a max of 12.3% ending in 1999, a min of 2.9% real in 1981). 

The average beginning dividend yield for the index during this time was about 4.7% (note this goes to 2011, so it'd be a teensy bit lower including the last 5 years of data)
https://www.researchaffiliates.com/documents/IWM_Jan_Feb_2012_Expected_Return.pdf, Page 6

Dividend yield right now is 1.7%, 3% less than the historical average.

A likely retort would be "well who cares about divvy yield, companies are paying out less in dividends, more in buybacks and investing for growth". I'd agree but the benefit of buybacks / investments should show up in greater long term real EPS growth, which it hasn't (maybe it will?).

The long term average real EPS growth is about 1.7-2.0% and it has been there over recent periods. This is more volatile than you'd think over 25 year periods. The most recent 25 year period ending December 2016 is 5% real earnings growth (which is amazing! but very end point sensitive), but the average year is 1.7%, the average 10 year moving average is 1.6%, the average 10 year moving average of trailing 25 year real EPS growth is 1.5%. I have a hard time getting to higher real EPS growth than history using this data.
http://www.multpl.com/s-p-500-earnings/table

So if your starting yield is 3% lower than history (which is a combination of payout ratios being lower and valuations being higher), if your real EPS growth is the same as history (which is basically saying that companies aren't growing any faster despite paying out less), if there is no impact of multiple expansion/contraction, how does one get to historical returns in line with history?

Is there something wrong with the equation put forth? (asking genuinely here, not socratically)

I would love to be wrong and for you to be right. If we get 8% real over the next 25 years, than that will be awesome.

My professional life is spent hoping for 5% on a pretty risked up portfolio but expecting 0%-3% If we get 8% real from stocks, then that solves a lot of the world's problems (underfunded pensions and stuff)

EDIT: I did some work on this a little while back and found my file that decomposes equity returns.

For the past 20 years, it's about
+4.8% CAGR from EPS growth (inclusive of inflaiton) (revenue per share grew 3.8%, margins expanded, overall EPS CAGR of 4.8%, inflation was 2.2%)
+1.8% CAGR from average divvy yield,
+0.5% CAGR from valuation
7.1% return (nominal) ending 12/2016, that's about a 5% real return)

For the 3 years ending 2016 it's about
+0.4% CAGR from EPS growth
+2.0% CAGR from average divvy yield
+5.6% from valuation

in 2016 it was no earnings growth, 2% divvies +8% valuation.

[scottish]

:0  I think my threads been taken over!     It sounds like financial writers are suffering from the herd effect yet again.

I'm pretty skeptical that analysis using these more detailed metrics is going to be sufficiently accurate to rely on.   Personally I prefer to just look at the first order statistics and call it a day.    There are so many exogenous factors that financial market behaviour is effectively impossible to predict at any level of detail.   

[MrSpendy]

Earning 5% over inflation when inflation is 10%, is not as good as earning 3% over inflation when inflation is 1%.  It is straightforward math.  In one case nominal $ grows faster, in the other real dollars.

If I earn 5% real for 20 years , I will turn $1 of purchasing power into  $2.65
If I earn 3% real for 20 years , I will turn $1 of purchasing power into  $1.80

Correct?

[PizzaSteve]

Earning 5% over inflation when inflation is 10%, is not as good as earning 3% over inflation when inflation is 1%.  It is straightforward math.  In one case nominal $ grows faster, in the other real dollars.

If I earn 5% real for 20 years , I will turn $1 of purchasing power into  $2.65
If I earn 3% real for 20 years , I will turn $1 of purchasing power into  $1.80

Correct?

[edit]
Yes i used bad math on my hasty example.  Lets leave it at that and i will delete my comments.  I personally observe that the ability to effectively use leverage and sustain business profits is easier under a stable, low COC model (one like the era we currently enjoy), which will reduce business failures and stabilize earnings, but at a lower level.  Digging into the why I realize is not well suited to this format of dialog.

[edit]  Lets drop the topic and I will say that I was wrong and folks can move on.  I have removed my prior comments.

[Eric]

:0  I think my threads been taken over!     It sounds like financial writers are suffering from the herd effect yet again.

I'm pretty skeptical that analysis using these more detailed metrics is going to be sufficiently accurate to rely on.   Personally I prefer to just look at the first order statistics and call it a day.    There are so many exogenous factors that financial market behaviour is effectively impossible to predict at any level of detail.   

So you asked why people state that they expect lower returns.  People told you why.  You then dismissed the reasons because they were too complicated.

You can look at the first order statistics, the main one being CAPE, and see that because of the high valuations that near(er) term returns should be lower than average.  Notice that the error bars are still pretty large, so no one is stating exactly what the return should be, only that it will likely be lower than average.  That's why you see predictions in a wide range of 4-6% or something like that.  This is how it's worked every time in the past, which makes it likely the future will behave similarly.

[MrSpendy]

That said, the ability to effectively use leverage and sustain a business is much easier under the low COC model.  Leveraged dollars are earning triple their cost.

What does this mean?

What type of business?

Are you saying that corporations are paying a low percent of EBITDA in interest because of low rates? this is empirically true and is captured in earnings/margins/earnings growth

What specific application of leverage do you have in mind? (housing? corporate equities? equities on margin?)

 I don't understand the meaningfulness "leveraged dollars are earning triple their cost". If I borrow at 0.0001% and invest at 0.0003%, my leveraged dollars are earning triple their costs, but who cares?

[scottish]

:0  I think my threads been taken over!     It sounds like financial writers are suffering from the herd effect yet again.

I'm pretty skeptical that analysis using these more detailed metrics is going to be sufficiently accurate to rely on.   Personally I prefer to just look at the first order statistics and call it a day.    There are so many exogenous factors that financial market behaviour is effectively impossible to predict at any level of detail.   

So you asked why people state that they expect lower returns.  People told you why.  You then dismissed the reasons because they were too complicated.

You can look at the first order statistics, the main one being CAPE, and see that because of the high valuations that near(er) term returns should be lower than average.  Notice that the error bars are still pretty large, so no one is stating exactly what the return should be, only that it will likely be lower than average.  That's why you see predictions in a wide range of 4-6% or something like that.  This is how it's worked every time in the past, which makes it likely the future will behave similarly.

I shouldn't have been so dismissive.   I actually saw your first post and then lost track of it in all the other discussion.

If I understand everything so far, Professor Shiller has shown that inverse CAPE is correlated with long term market returns.   CAPE is high right now, so long term returns should be low.

I notice that his maximum correlation coefficient is a bit below 0.7.   IIRC in science and engineering, we tend to attach significance to correlations above 0.7, not below.    The point being that this doesn't look like a very strong relationship.

He's made his data available on-line, so it's worth a more detailed look.   Thanks for this.

[PizzaSteve]

:0  I think my threads been taken over!     It sounds like financial writers are suffering from the herd effect yet again.

I'm pretty skeptical that analysis using these more detailed metrics is going to be sufficiently accurate to rely on.   Personally I prefer to just look at the first order statistics and call it a day.    There are so many exogenous factors that financial market behaviour is effectively impossible to predict at any level of detail.   

So you asked why people state that they expect lower returns.  People told you why.  You then dismissed the reasons because they were too complicated.

You can look at the first order statistics, the main one being CAPE, and see that because of the high valuations that near(er) term returns should be lower than average.  Notice that the error bars are still pretty large, so no one is stating exactly what the return should be, only that it will likely be lower than average.  That's why you see predictions in a wide range of 4-6% or something like that.  This is how it's worked every time in the past, which makes it likely the future will behave similarly.

I shouldn't have been so dismissive.   I actually saw your first post and then lost track of it in all the other discussion.

If I understand everything so far, Professor Shiller has shown that inverse CAPE is correlated with long term market returns.   CAPE is high right now, so long term returns should be low.

I notice that his maximum correlation coefficient is a bit below 0.7.   IIRC in science and engineering, we tend to attach significance to correlations above 0.7, not below.    The point being that this doesn't look like a very strong relationship.

He's made his data available on-line, so it's worth a more detailed look.   Thanks for this.

In his article on CAPE, Shiller stated that CAPE can explain perhaps 1/3 of valuation decisions by the market.  As i mentioned in another thread, asset valuations can be independent of earnings.  Anyone who has dived deep into corporate accounting understands this.  Overall, the market looks at discounted future cash flows, but also the breakup value of the underlying assets.  Both of these are difficult to evaluate, but again while earnings are king, they are not the only thing.  Many companies, for example, own or control huge natural resources.  Land, timber, mineral rights, water rights.  The market view of the future value of these assets may not be correllated with current income generation activities or 10 year rolling average past return on equity statistics.

Another example is the difficulty in valuing Brand and human capital.  Consider why a basketball franchise can be worth billions, with limited income and very little in the way of tangible balance sheet assets.  Yet Michael Jordan branded products are a global phenomenon.  The market is an aggregation of thousands of these phenomena, which is a much more complex system than CAPE. 

That said, we need measures, so we create proxies.  CAPE is a good one as it covers business cycle variations, stays focused on real value creation via earnings, is measurable, etc.  What it misses are these balance sheet factors, like underleveraged assets, technology discontinuities that generage new wealth, human factors like unique management talent, etc.

[Mighty-Dollar]

Does anyone understand why the financial media are on about how we can only expect 4-6% long terms returns from equities?

Yes. It's annuity salesmen, REIT salesmen, gold salesmen, hedge fund managers who are currently betting against the market, and anti-Trump people who want stocks to crash or want the economy to fail who are trying to bastardize stocks, conventional investing, the economy, etc.

[MrSpendy]

Mighty-Dollar, I think your argument is a strawman.

John Bogle, Vanguard, AQR, Bridgewater, GMO, William Bernstein are not REIT salesmen, annuity salesmen, gold salesmen,  hedge fund managers betting against the market (all three non-vanguard asset managers here offer long-only products in addition to some hedge funds and none of them are taking some massive bets against the market), or anti-trump people who want stocks to crash or want the economy to fail or who are trying to bastardize conventional investing.

Instead, each is a data driven person/organization, who has attempted to define the fundamental and long term reasons why stocks go up over time and build an inherently uncertain (and WRONG in the short term) model/scenario of intermediate term stock returns.

None are advocating for market timing or getting out. Most believe returns will be lower than recent history and long term history.

 I'm sure i could find some more, but I think this is a decent cohort. These guys aren't the "financial media" or some huckster out to get you and steal your money or put you in some shitty annuity.

I'm not trying to shake anyone's faith in stocks (and have the vast majority of my net worth in them; i prefer stocks to everything else), but just trying to say that expecting lower returns is not irrational given the data/what comprises stock returns.

John Bogle (everyone knows who this is)
https://www.cnbc.com/2017/03/22/jack-bogle-believes-the-stock-market-will-return-only-4-annually-over-the-next-decade.html

Vanguard (everyone knows who this is)
https://personal.vanguard.com/pdf/ISGVEMO.pdf

As a consequence of this strong past performance,  our outlook for global equities remains guarded, in the 5%–8% range. As shown in Figure II-4, the central tendency of our VCMM simulations for ten-year expected returns for a global equity portfolio is below both the long- run historical annualized average return (10%) and our own forecasts from just five years ago (based on the June 2010 distribution). When returns are adjusted for future inflation, we estimate a 50% likelihood that a global equity portfolio will produce a 5% average real return over the decade ending 2026, in contrast with 6.8% per year for 1926– 2016. As such, our long-term outlook is not bearish, and can even be viewed as positive when adjusted
for the low-interest-rate environment.

Our conservative outlook for the global stock market is based primarily on market valuations, such as price/ earnings (P/E) ratios. Some may wonder why our outlook is not more bearish. After all, widely followed market valuation metrics such as the Shiller cyclically adjusted price/earnings, or “CAPE,” ratio are significantly higher than historical levels. When adjusted for lower expected growth, low interest rates, and low inflation, however, we would expect slightly higher equilibrium P/E ratios. This higher equilibrium level is the right benchmark for determining whether the market is overvalued or undervalued.

AQR (systematic "smart beta" money manager, not betting against the market)
https://www.aqr.com/library/aqr-publications/alternative-thinking-1q-2017-capital-market-assumptions-for-major-asset-classes

I like AQR's in that they attempt to incorporate buyback yield since corporations have changed how they pay out money. Note that it adds about 100 bps to expected returns, not a huge difference maker, but that's one thing that's materially different from when stocks used to yield 4.5%.

Our current estimate for the long-run real return of U.S. equities is 4.2%, somewhat lower than most other developed markets (average 4.6%) and emerging markets (5.4%)......In the classic DDM, the expected real return on equities is approximately the sum of dividend yield (DY), expected trend growth (g) in real dividends or earnings per share EPS, and expected change in valuations (v), that is: E(r) ≈ DY+g+v. As in past years, we average estimates from two methods which include the first two terms — yield and growth proxies — but assume no mean reversion in valuations, i.e., E(r) ≈ DY+g. This year, we revise our methodology to account for the structural change of firms replacing dividend payouts with share buybacks since the 1980s, which can influence both the yield and growth estimates. We provide a summary here with more color in the
appendix..... It bears stressing that the message we take away from all the above is not to time the market aggressively16 but to make sure to use reasonable (i.e., lower) expectations for asset class returns, and diversify as much as constraints permit across many sources of expected returns.

Ray Dalio / Bridgewater (hedge fund / adviser to pension plans/other institutions), offers products that don't bet against the market

https://www.bloomberg.com/news/articles/2016-03-03/bridgewater-s-ray-dalio-says-i-m-not-bearish-on-stocks
"4% expected return"

GMO (large institutional money manager), its products don't bet against the market
Note: GMO is far more bearish, since their model projects mean reversion in valuations and margins over a 7-year time frame. GMO's projection have generally been too bearish, over the long run. They generally do a good job of projecting relative asset class returns (so my recommended takeaway would be 'there's a chance US underperform emerging for valuation reasons, but don't try to market time based on GMO's punitive margin/valuation mean reversion'"
http://www.superinvestorbulletin.com/2017/04/21/gmo-q1-2017-7-year-asset-class-forecast/

William Bernstein (a boglehead)
http://www.efficientfrontier.com/ef/403/fairy.htm
Bernstein concludes the change in divvy payout/tech innovation doesn't matter, because earnings aren't growing that much more.

Finally, we are able to estimate stock returns. Recall, the dividend yield of the market is currently only 1.5%. And, as we’ve already seen, the annualized growth of dividends is about 4.5%, for a nominal expected stock return of 6%. Ah, you say, dividends don’t matter any more; share prices will soar as companies grow their revenues and earnings to the sky using dramatic technology-driven productivity increases. There’s only one problem: it ain’t happening. Take a close look at the right edge of the above graph. Do you see any acceleration in earnings growth? If you do, then clip the title of this article for 10% off your next optometry visit. (The sharp-eyed among you may detect that the slope of all three plots is slightly higher during the second half of the period. Alas, it is entirely due to inflation; in real terms, the growth rate of corporate dividends and earnings did not increase during the twentieth century.)

EDIT: I think the bernstein article is super old. I think it's still relevant but just wanted to note that.

[triangle]

This article touches on this topic and the often discussed approach of passive investing.  https://seekingalpha.com/article/4116840-prepared-crash

While you might be tempted to view it as an advert for his premium research service, it presents some data worth thinking about. It was ironic to read that right before learning about Amazons big quarter.  AMZN stock rose over 13% on Friday. If my quick calculation was correct, AMZN added over 61 billion in market cap, which is roughly the current market cap of FedEx. Or stated a different way their market value increased by about the equivalent of the 100th largest company in the S&P 500 in one trading day.

[PDXTabs]

As far as I can recollect this started in earnest around 2011 where the proclamations were "expect 5% nominal for the next decade".  I hope no one followed that advice in 2011 because they've missed out quite a bit.

I don't get it. If someone says "expect 5% returns," I hear "expect 5% returns, so you better save MORE." How can following that advice be bad?

[Indexer]

I personally think 4-6% over the next decade could end up being optimistic. Many things like CAPE have been mentioned. If one sole metric suggested lower returns I could ignore it. When CAPE, Market cap/GDP, PE, and Avg. equity allocation are the highest they been since the tech bubble, and we have rising rates in a mature business cycle(full employment), and novice investors are getting really bullish(they are blind to risk)... that's a lot to ignore.

I don't think people should sell. I do think assuming a lower discount rate in your FIRE projections would be prudent.