Estimating Future Stock Returns, June 2023 Update

Image Credit: Aleph Blog || Has the return on assets for public equities permanently risen? The return on bonds has risen for now.

From the last piece: “At March 31st, 2023, the S&P 500 was priced to return 2.41%/year over the next ten years. Given the rally since then, that return has shrunk to 0.49%/year. Currently the 10-year Treasury yields 3.76%. In investment grade corporates, you could earn more than 5% with considerably lower risk.”

There was an error in that statement, the return had only shrunk to 1.64%/year. A similar adjustment would have to be made to the second graph, which would look more like the graph below.

At June 30th, 2023, the S&P 500 was priced to return 1.65%/year over the next ten years. Given the rally since then, that return has risen to 2.03%/year. Currently the 10-year Treasury yields 4.29% [bond-equivalent yield, add 0.09% to annualize]. In investment grade corporates, you could earn around 6% with considerably lower risk.

Here’s my current outcomes graph:

Image Credit: Aleph Blog || Upside capped, long left tail…

So, on average no price change for 10 years. You just collect your dividends.

There are several ways to get better outcomes from stocks. First, go abroad, there are much better values available in Europe, Japan, and in the emerging markets that respect the rule of law. Second, decouple from the high-tech growth stocks. I’m able to find a lot of stocks in the US with good balance sheets that are small-to-midcap that are cheap relative to growth prospects. Away from the “cool” sectors of the market there are many large-cap stocks with reasonable prices relative to prospects.

That’s all for now. I may blog more, I may not. Business is taking up more of my time. Watch your risks to keep your returns.