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Legendary hedge fund manager Stan Druckenmiller, in an interview with Palantir CEO Alex Karp, recently gave a pretty bleak assessment of the stock market in the years ahead.

"There's a high probability in my mind that the market, at best, is going to be kind of flat for 10 years, sort of like this '66 to '82 time period." https://t.co/M9FV4EodbY

— Jesse Felder (@jessefelder) September 16, 2022

This may leave some wondering what specifically makes Stan so bearish today. Well, as the Fed recently warned, the windfall in corporate profits driven by both interest rates and corporate tax rates falling to the floor is a phenomenon that simply won’t be repeated.

'The reduction in interest and tax expenses is responsible for a full one-third of all profit growth over the prior two-decade period. That boost to corporate profits is unlikely to continue, indicating notably lower stock returns in the future.' https://t.co/bhaHcJg3RU pic.twitter.com/GBE9ZecIjy

— Jesse Felder (@jessefelder) September 16, 2022

And in the context of equity valuations that have come to discount that phenomenon continuing indefinitely into the future, that’s a real problem.

REGARDLESS of the valuation ratio V you use

Expected 10-yr total return ~
(1+g)(V_norm/V_today)^(1/10)+div yield

where g is expected growth of your fundamental

P.S. Unless you expect permanently rising margins, exclude the amortized contribution of past margin expansion from g pic.twitter.com/uH4Cigpxs4

— John P. Hussman, Ph.D. (@hussmanjp) July 25, 2022

As a result, investors are likely going to have to do more than just passively buy and hold a broad stock market index if they want to avoid a prolonged period of negative real returns.

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