Wall Street expects the stock market to earn a return in 2025 that is similar to the average return over the past 100 years. Do you agree?
Forbes, Reuters and others report that Wall Street expects a 10% return on US stocks in 2025, with a range between 8% to 12%, aligning with average returns over the past. Unpacking these estimates reveals an expectation that the market’s Price/Earnings will remain the same next year as it is now.
Framework
There’s a framework for turning your P/E expectation into a return forecast. The following formula is always correct because it is a tautology. To predict the future, simply estimate earnings growth and P/E expansion or contraction, which is driven by investor behavior.
Return = Dividend Yield + (1 + Earnings Growth) X (1 + P/E expansion/contraction) – 1
So, what if P/Es contract as they regress to historically more normal levels? As shown in the following table, stock markets will correct in 2025, losing an estimated 30%
Your Forecast
Is Wall Street Gaslighting us because they want us to stay in the market? Where do you see P/Es a year from now? You can look up your P/E row in the table above. Note that the Earnings Growth columns don’t change the forecast much but find your column and note what the corresponding cell holds as your forecast. Does this make sense to you?
Future P/Es
The US stock market is currently expensive by every measure. Of course it could become even more expensive. Justifications for the current high price include:
· Low interest rates cause discounted future earnings to be high
· The stock market is an inflation hedge
· Artificial Intelligence is the new Dotcom promising a rosy future
· The Trump presidency is good for the stock market
On the negative side, the current exuberance is building to a Minsky Moment that could cause the market to crash upon itself due to its very own weight, plus there are plenty of potential catalysts like war, inflation, geopolitics, etc.
Your forecast reflects your outlook for expensiveness. More of the same, or regression toward the mean?
Baby Boomer Warning
Forecasting is a critical step in market timing, a very hard thing to do right. But risk management for baby boomers is much easier, It’s why my “Revenge of the Baby Boomers” article got 80,000 reads on SA. Baby boomers cannot afford losses at this time in their lives because they might not live long enough to recover, and their lifestyles could be dramatically reduced.
Baby boomers should be protecting their lifetime savings at this time in their lives. I’ve recommended TIPS and inflation-protected equities like natural resources and precious metals. Everyone else, beware.
More By This Author:
60 Million Baby Boomer Votes Sway The Presidential Election
No Country For Baby Boomers
Baby Boomer Protective Investments Exclude Stocks And Bonds
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