THE NEXT TEN YEARS FOR STOCKS

You may have seen the articles in the financial press about the forecasts for the stock market over the next ten years.  Most of the big investment firms are expecting a decade ahead with low or mediocre returns for stocks.  Here are some of the forecasts for the returns of the S&P 500 over the next decade.

	Projected Annual Return %
	Next 10 Years
Goldman Sachs	3.0%
Charles Schwab	3.4%
Vanguard	4.5%
JP Morgan	6.7%
Yardeni Research	10.6%

Remember that the S&P 500 typically generates average annual returns of about 10% per year over ten-to-twenty-year time periods. 

So why are most people calling for such low returns?  With the exception of Yardeni Research, the big firms are expecting stock market returns to be about half of what is considered average or normal.

The reason is something called “Reversion to the Mean”.  Because returns have been so far above normal for the last 15 years, it will take many years of low returns to bring the results back to the average.

The average annual returns for the S&P 500 have been right around 14% for the last 10 years and the last 15 years.  So, the market has outperformed by about 4% per year over the last 15 years (40% above normal).  Since these excess returns were not driven by an increase in corporate profits, most people (including me) feel that the current market is overvalued. 

Just doing some simple calculations, to bring stock valuations back into line over the next decade leads you to lower than average returns. 

Another point of reference which illustrates Reversion to the Mean in practice is the 30-year time period between 1980 and 2009.  The 1980’s and the 1990’s were tremendous decades for the stock market.  The average annual return for the 80’s and 90’s was about 14% per year without dividends and about 16% per year including dividends. 

After two consecutive decades of outstanding returns (60% above average), we were due for a decade like the one we experienced between 2000 and 2009.  In the first decade of this century, the S&P 500 dropped by 2.7% over the 10-year time period.  Even after including dividends stocks actually lost money in this period. 

Reversion to the mean is a real thing.

My Estimate

Those of you that know me are aware that I don’t like to make short-term predictions for the stock market.  This is because getting short term market predictions right is almost impossible.  The stock market is irrational in the short term. 

The stock market, however, is much more predictable in the long term.  I prefer to use 20 years as my long-term horizon since returns for 20-year time periods are much more consistent than 10 year periods.  But I decided to take the bait this time.

I, too, believe in the “Reversion to the Mean” principle.  And I also estimate that the current market as measured by the S&P 500 is overvalued (17.8% according to my models as of 2/1/25).  So, I too am expecting below average returns over the next 10 years.

My estimate for the average annual return for the S&P 500 over the next 10 years is 7.2%.  My number is below the norm but not as pessimistic as most of the other forecasters.

Key Considerations

The reason I am using the last 15 years actual performance as a reference and not 20 years is because we just started to emerge from the last ugly bear market in 2009.  If we were to use the performance of the last 20 years, we would be including the Great Financial Crisis of 2008.

That is one reason why my projections are probably a little higher than the others.  Even though the 15-year time period does not include the awful year of 2008, the stock market was still significantly undervalued in 2010 (the start of the 15-year time period).  The returns for the last 15 years, therefore, should have been above average to account for the undervalued starting point.

I also factored in a small increase in corporate profitability due to the impact of AI on corporate efficiency.  Higher profits equal higher stock prices. 

I also expect one big bear market and one smaller bear market over the next 10 years.  The important point here is that whether we see 4% average returns or 7% average returns over the next decade, the annual returns will not be smooth.  Like most decades, there will be really good years, bad years and in between years.  It is anyone’s guess as to when the good years or the bad years will appear. 

The following graph is a wild guess that I made for illustrative purposes only.  Just to repeat, I don’t make short term market forecasts.  This chart of annual returns corresponds with my estimate of 7.2% average annual returns for the S&P 500 over the next 10 years.  I created this to set your expectations of how the 10-year average returns will likely come in.  The timing will no doubt be way off, but the distribution of returns will look something like this.  There will be great years and bad years and mediocre years. 

The thing that could cause stock market returns to be higher than my projection is AI.  I am a believer in AI as a profit driver.  But because we haven’t seen any significant impacts yet, my expectations are conservative.  If AI delivers the way many of us think it can, the average returns for the stock market could be over 10% per year.  Time will tell.

Stay Disciplined My Friends,

Phil McAvoy

---

Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.