For this (veteran) writer, no source provides more data-rich, well-founded, and compelling predictions for future investment returns across multiple asset classes than Research Affiliates. And what this source now predicts for US large-cap stocks, the kids back so far in 2023, is really sobering.

Based on its inflation and earnings expectations, Research Affiliates expects the S&P 500 to deliver real returns of just 2% per year over the next decade, a tiny fraction of their returns. annually over the past 10 years.

Research Affiliates is a firm that designs investment strategies for $130 billion in mutual funds and ETFs for managers such as Pimco, Charles Schwab and Invesco. He created a model called “fundamental indexing” that weights stocks not by their dollar value, but by fundamental metrics such as cash flow, sales and dividends. The company’s RAFI-branded fundamental funds are therefore structured to avoid placing an increasingly large percentage of total holdings in the most expensive stocks, a big problem for traditional index funds and ETFs and other “weighted” vehicles. based on capitalization” where the allocations are based on shares. ‘ market capitalization. RA founder Rob Arnott is the former editor of *Journal of Financial Analysts*, and ranks among the top academic thinkers in portfolio management. RA’s CEO and Chief Investment Officer, Chris Brightman, is also one of the leading masters of science-based data analysis in the investment industry.

RA’s website features an “Asset Allocation Interactive” map that shows the firm’s 10-year total return projections for three dozen investment categories, from emerging markets to REITs, TIPS to commodities. Figures are based on the “mean reversion” principle. By predicting changes in valuation, for example, RA predicts that over the next decade, price-earnings (P/E) ratios will move from their current levels to their long-term averages. He also believes earnings per share will grow near historic norms and ignores the Bluebird’s predictions of steady double-digit growth typically advanced by Wall Street analysts.

## Falling P/Es and Modest Earnings Growth Will Mean Low Future Returns

In its chart for US large caps, RA predicts that earnings per share (EPS) will grow, on average, 5.4% per year through 2033. This number equates to 2.5% “real” earnings, since RA forecasts an inflation of 2.9. % annually, well above the Federal Reserve’s 2% target. This 2.5% earnings growth figure looks surprisingly low compared to the period from mid-2013 to mid-2023, when earnings beat inflation by an average of 5.2 percentage points per year. , but it’s actually pretty good by historical standards. Reputable research shows that over the long term, EPS lags GDP as companies make dilutive acquisitions and new entrants drain sales and profits once spread among entrenched pillars. The RA view implies that EPS may well “outperform” by growing faster than the economy; the Congressional Budget Office projects that GDP will grow by just 1.7% to 1.8% per year through 2033. Therefore, RA takes a healthy but fairly optimistic view of earnings.

By contrast, Wall Street analysts postulate that the S&P 500 EPS rises 29% between the first quarter of this year and the end of 2024 alone, reaching more than 40% of the 10-year AR forecast in just seven quarters.

RA expects an additional 1.7% annual yield from dividends, close to the current yield. Add the dividend yield and projected earnings growth, and you get 7.1%. But that’s the total return you’d get if the P/E held steady at the current level of 25. By RA’s best guesses, that’s not going to happen.

The company sees the 500 P/E, based on 12-month earnings, contracting towards its norm of the past decades. But once again, the results are hardly pessimistic. RA forecasts a decline in the multiple from 25 to 20.4, a figure that sits around the median of the past 30 years. The contraction of almost five points reduces the annual gains in stock prices of 5.4% that they would register if the P/E remained at the current 25, by 2.2 points per year, at an annual rate of only 3.2%. Add those 3.2% annual capital gains to the 1.7% dividend yield and you get a total AR return of 4.9%.

Where does the RA formula see the S&P 500 index in 10 years? The net annual increase of 3.2% in the price of shares would mean that the 500 results 6000 in June 2033,* just 37% above its June 22 close of 4381. *

## Forecasts look particularly bad compared to the last decade

The most important measure is the additional purchasing power that the annual earnings of 4.9% will give you. With projected inflation of 2.9%, the dollars in your wallet will grow only 2% faster than the increase in the price of food, rent, and all other expenses (that total gain of 4.9% less projected inflation of 2.9%). In other words, largely because the starting point for investing in large caps is so expensive, you’re likely to only get 2% real annual returns over the next decade.

Compared to the generosity of the past 10 years, this number seems almost inconceivable. From mid-2013 to mid-2023, the S&P 500 generated an inflation-adjusted total annual return of 10.1%. It is *five times* what RA deems most likely for the next decade. Just a hint. People and funds could buy the index in the second quarter of 2013 at a P/E of 17.6. It’s 30% cheaper than today. These favorable prices paved the way for high returns. In the future, the reverse dynamic will take over. Periods of low returns follow episodes of outsized gains. This is how the market seesaw returns to equilibrium. And that is the dark dynamic that is likely to reign in the years to come.

This story was originally featured on Fortune.com

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