As investors are navigating all the buzz about this week’s potential rate cut and the upcoming presidential election, JPMorgan is forecasting a serious risk to long-term stock returns. The market appears to be too expensive relative to history, according to the firm, which is projecting a 5.7% annual return from the S & P 500 over the next decade. That is barely above half its post-World War II average, analyst Jan Loeys said in a recent note to clients. According to Loeys’ analysis, the broad market index’s current trailing operating multiple of 23.7 makes the S & P 500 roughly 25% more expensive compared to its average multiple of 19 over the past 35 years. For the past three decades, corporate earnings have been growing much faster than the overall economy’s pace, which has contributed to high equity returns and U.S. outperformance, he said. .SPX 5Y mountain S & P 500 performance over the past five years. “We have been warning over the last few years about the risk of a coming end of the Great Moderation because of more active fiscal policies and a reduced fixation with inflation control. This would raise risk premia and thus depress equity multiples,” Loeys wrote in the Friday note. The “Great Moderation” refers to the period from the mid-1980s to 2007 that saw low inflation and steady economic growth. “The Great Moderation is at serious risk of reversing as the macro-economic stability it produced did not deliver the goal of greater long-term investment and growth and instead coincided with weaker growth and capital spending and much greater inequality,” Loeys added. Some risks that could depress equities moving forward, aside from their expensive valuation, include the growing cohort of elderly baby boomers that will lower their equity allocations, as well as de-dollarization and de-globalization, the analyst said. Earnings growth could also be affected by the several downgrades the U.S. has received over the past few years on the worsening quality of its democracy, which could hurt its economy and stock market, the firm added. Rising borrowing costs due to “out-of-control federal deficits” could also eat at corporate earnings, the firm said.
Don’t expect much from stocks for the next decade, says JPMorgan
Sep 16, 2024
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