Future Returns and Stock Market Valuations

One may observe the following three factors contribute to future market returns:

(i)         future business growth;

(ii)        dividends; and

(iii)       change in market valuations

The total projected market returns for all three components for developed and emerging markets is shown below:

                                                Projected Annualized Market Return (%)

For emerging markets, contribution from economic growth is higher than in more developed markets.

Over the past 100 years, equity investors have managed to generate real capital growth of about 7 per cent annually. No other investment – bonds, cash, gold or real estate – offers comparable return potential. But does it pay to invest in equities at this point in time and what can what can investors expect in the long-term? Academic research has shown that undervalued equity markets have achieved higher future returns in the long-run than their counterparts. Shiller’s CAPE suggests the following:

            World              CAPE

            -Developed     22.9

            -Emerging       14.9

Warren Buffett believes the percentage of total market cap relative to GNP is “probably the best single measure of where valuations stand at any given moment”.

Reference
Global Stock Market Valuations and Expected Future Returns (https://www.gurufocus.com)