This Could Be a Lost Decade for Stocks

US stocks could bounce back from their bad start to the year. How they do in the long run is another matter.

Entering 2022, expectations are huge. A Natixis survey of individual investors in 24 countries in 2021 found that US investors are the most predictive of the bunch with 17.5% annualized returns going forward. The difference between that and historical experience is clear: Compared to the long-term US stock annual return of about 9.8%, a $10,000 investment should grow to about $50,000 in 10 years. year instead of $25,000. But even the stock’s more limited long-term returns seem like something to be desired.

Investors’ optimism is easier to understand if we look at the 10 years through 2021, where the benchmark S&P 500’s compound annualized return is a very good 16.6% — not too far off the charts. what those surveyed extrapolated. However, its components need to be scrutinized more closely.

Experts love to talk about earnings growth, but it barely takes into account the stellar decade that ended last December. According to data from Semper Augustus Investments Group, earnings per share of the S&P 500 are growing at an average of 7.7% a year. That rapid pace was achieved as the company’s profit margin increased from an already respectable 9.2% to 13.4%. Profits would be about 4 percentage points lower if margins were not extended.

With labor and materials costs rising and the Trump administration’s corporate tax cuts already behind us, it’s not unreasonable to expect that profit gains will stall or reverse. Even during the tech and housing boom, it’s unusual for the S&P 500’s operating profit margin to exceed 9%.

More important is the price investors are willing to pay for a dollar of earnings. That number increased from a multiple of 13 times to 23.6 times in the decade ending December 31, 2021. Multiples between 15 and 16 are the historical average.

Predicting what prices investors will pay in the future and when or whether they will return to the average is notoriously difficult. However, the recent sell-off could be the first stage of that correction, according to Christopher Bloomstran, a veteran value investing expert who is now president of Semper Augustus. He wrote in an email interview that tightening monetary policy could be the catalyst.

“The Fed has a perfect bubble record. They are unlikely to fail this time,” Mr. Bloomstran wrote.

Another well-known value investor, Jeremy Grantham, co-founder of asset management firm GMO, wrote in January that US stocks have entered their fourth “super big” in 100 years and he predict they will be halved. In addition to quantitative reasons such as statistical deviations from long-term trends, he cited a more subjective historical sign like ringing bells near the top – “crazy” speculation, this time on meme stocks, EV maker, crypto and NFT.

The markets have been looking increasingly shaky lately: Stocks, bonds, and cryptocurrencies have all fallen in value as investors struggle to manage volatile global financial markets. WSJ’s Caitlin McCabe looks at some of the reasons behind the recent market frenzy. Photo: Spencer Platt / Getty Images

The mood has been sour lately, with the S&P 500 falling another 45% or so if both margins and price/earnings multiples return to their long-term averages — about the drop that analysts say. Mr. Grantham’s suggestion — reclaiming the standard a level it first surpassed five years ago.

That may sound alarming, but stock levels in 2031 could be the same whether Mr. Grantham is right or not about a sharp bear market. The alternative could be a milder sell-off and a recovery in the way of what we’ve been through lately that has led the stocks to go nowhere. It is not the journey, but the destination.

Write letter for Spencer Jakab at

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