Decade-long S&P 500 bull surge is running into a valuation wall
US stocks has showered money on the buy-and-hold faithful and made virtually every other asset class an also-ran.
So great have the gains been that some fairly simple math shows that however roaring the 2020s turn out to be, reprising the last decade’s bounty will take near-miracle expansions in earnings and valuations.
The math comes courtesy of Jordan Brooks, a principal at AQR Capital Management. He analyzed drivers in the market that account for gains of almost 12% a year since 2013 versus inflation-adjusted rates on cash.
And given stocks’ elevated starting point now, he concluded, generating even average returns is something of a long shot.
“Stars must align in order to see an encore of last decade’s equity market performance,” Brooks said. “After long periods of outperformance, valuations are typically rich, which results in weaker forward-looking expected returns.”
Leave it to the quants to find the dark lining in markets that have acted like cash registers since the trauma of the global financial crisis.
This year was no exception, with the S&P 500 jumping 24% and the tech-heavy Nasdaq 100 surging nearly 54%, its best annual gain since the dot-com boom of the late 1990s. While nothing in the numbers prohibits stocks from continuing to rise, the math reveals the scope of the challenges to a repeat with valuations as stretched as they are now.
Brooks’s analysis focuses on the 10 years through this June, but its upshot holds for a market that has added another 7% since then.
