The First Negative 10-Year Return Forecast In 22 Years

I’m rarely, if ever, in a “good mood” on any conventional definition.

For the past dozen years, I’ve persisted in what feels like a kind of purgatory. Indelible images — a cotton candy sunset reflected perfectly on a glass-like low tide — don’t stick. Nothing resonates. I’m never really “present.” My neighbors find it off-putting. They think I’m aloof. Ironic because almost all of them are arrogance personified. It’s not that I don’t “enjoy” company. It’s that other people come across as wraith-like props to me.

The upside to my surreal drift is that just as “good moods” and other manifestations of pseudo-euphoria are absent, so too are “bad moods.” I’m rarely irritated or perturbed. Except, perhaps, by the presence of willful ignorance. And that I can mostly avoid simply by avoiding people and especially social media.

The closest I come to being momentarily giddy is reading something I know was likely written begrudgingly. All the better if the person is right, but reality is currently refusing to cooperate. Typically, things written begrudgingly involve just such a juxtaposition.

There’s something delightfully amusing about such missives, especially when they’re written by professions for professionals. In those cases, the cadence can’t be overtly caustic lest one should lose a job, so instead, you get deadpan, fact-stating. And nothing is funnier than the deadpan stating of facts when you know it masks a kind of irritable sarcasm.

Such was the case with BofA’s belated “update” to the bank’s year-end S&P target, briefly discussed here on Wednesday.

Initially, I expressed some doubt about the utility of editorializing at length around Savita Subramanian’s “marking” of the bank’s forecast to 4,250 in the face of a benchmark that had run so far ahead of the old forecast as to make it totally far-fetched with just a few months to go in 2021. But, I’ll confess to catching a case of the giddy chuckles on a sleepy Thursday afternoon while revisiting the 21-page note, co-authored by Jill Carey Hall.

It’s chock-full of deadpan statements of fact, including the observation that at 29X, the S&P is “currently trading 51% above the historical fair forward PE.”

That’s an eye-popping statistic. And if you were someone who enjoyed the kind of editorial leeway that SocGen’s Albert Edwards does, you’d likely toss in all manner of exclamation points, bombast and superfluous punctuation in order to convey just how incredulous you think investors should be.

But this isn’t Edwards, so instead of “nonsense on stilts” (or some other such hyperbole) Subramanian dryly observed that, “price to normalized earnings has a very strong relationship to subsequent S&P 500 returns over the long haul, and the S&P 500’s current trailing normalized PE ratio of 29X suggests 10-year annual 12-month price return of -0.8%, representing the first negative returns since the Tech Bubble.”

That’s not a trivial observation. Again, it’s the first negative 10-year return forecast in 22 years based on long-term valuation which, Subramanian reminded market participants, “is almost all that matters for long-term stock returns.” The R-squared of normalized PE versus subsequent S&P returns rises steadily to 80% (or higher) as the holding period increases beyond a decade.

To be sure, not every factor in BofA’s model spits out a bearish forecast, but it was abundantly clear (to me anyway) that Subramanian and Carey Hall might have resorted to explicit incredulity or other more colorful language in a setting where such musings wouldn’t be considered uncouth. The title of the update was “Should you keep dancing if the music slows down?”

Speaking of the music slowing, Subramanian talked at length about the taper. As noted here Wednesday, BofA’s model suggests changes in the Fed’s bond-buying explained more than half of the non-earnings portion of changes in S&P 500 market cap since the financial crisis. Tapering could contribute 3% worth of downside to US equities by year-end, she reckoned.

Subramanian also quantified the expected impact in 2022. “Assuming trend growth of 6% YoY in 2023 EPS and another $490 billion increase in the Fed balance sheet in 2022, the S&P 500 would be at 4,500 by the end of [next year] based on our calculation,” she wrote.

Finally, Subramanian and Carey Hall calculated the return potential implied by a benchmark that goes from 4,500 today to 4,500 later: “Flat from here.”



Leave a Reply to Tom SwiftCancel reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

17 thoughts on “The First Negative 10-Year Return Forecast In 22 Years

    1. After the Tech Bubble popped in 2000, QQQ didn’t make a new high for 15 years.

      Granted, money making restarted in just a few years, since the index plummeted so deeply so quickly. Today, if SP500 were to make such a dive, trillions would be deployed to stanch the flow. More likely, I think, is a long stagnation or grind down.

      How will investors react to a decade of sideways markets?

      That’s not a rhetorical question – I’m wondering how modern market, industry, and investor structure, with all their feedback loops, would respond to a situation in which stock investors on average make little to no money for half a generation.

      1. “How will investors react to a decade of sideways markets?” I’ve lived through two of these, starting in 1966. You buy something besides stocks. I’ll probably have to live through one last one of these, if H and his info suppliers (and mine, for that matter) are correct.

  1. Quick additional point — not only is BOA’s 10-yr forward S&P forecast negative for the first time in 22 years, but since that time, the market has typically underperformed the forecast each year. Unfortunately, two negatives don’t make a positive, but they may yield a margin call.

  2. My forecast is for increased hesitancy and sluggish stagflation, mixed with pockets of growth spikes, sort of a metaphorical Covid-shaped sphere that lingers and drifts along in a chaotic direction. Covid has provided a very elastic example of supply/demand elasticity, so it’s not out of the question that the next year will be filled with a pattern that doesn’t fit into an easy (existing) model. Has anyone been right about interest rates in a few years?

    Think in terms of Einstein, who apparently said, “No problem can be solved from the same level of consciousness that created it.”

    That statement reminds me of how far off Corelogic was on housing valuations a year ago:

    ==> Corelogic forecast Oct 6, 2020

    Looking forward, the HPI Forecast also reveals the disparity of home price growth across metros. In markets like Las Vegas, where the local tourism economy and job market continue to struggle, home prices are expected to decline 6.5% by August 2021. Conversely, in San Francisco, home prices are forecasted to increase 7.8% over the next 12 months as low inventory continues to push prices up.

    Corelogic Top Takeaways August 3, 2021:

    Nationally, home prices increased 17.2% in June 2021, compared to June 2020. On a month-over-month basis, home prices increased by 2.3% compared to May 2021.
    In June, appreciation of detached properties (19.1%) was the highest measured since the inception of the index and nearly double that of attached properties (10.7%) as prospective buyers continue to seek more living space and lower density communities.
    Home

    1. Does that mean two longterm most likely outcomes for the market over the next 10 to 15 years? 1) It goes sideways or 2) a major correction in the near future followed by a 15 year clawback.

      Talking about pins, if tech rolls over will the market as a whole do anything other than option 2 above. I don’t see how GDP grows without it.

      1. I forgot to add; can a market overcome the drag of 25% of the population abandoning rational thought and focused only on hate and destruction. That’s got to be a big headwind.

      2. The USA holds the “ace of spades” in their back pocket for GDP growth.
        Under intelligent leadership ( assuming we can elect that), we are better suited to growth through immigration than almost all other developed, first-world countries.

  3. “It’s that other people come across as wraith-like props to me.”

    Given the breadth of remarkable quality (obviously both content AND style) across Heisenberg pieces over the years it’s truly difficult to state with any real clarity what my favorite Heisenberg piece might be, but this bit quoted here is at least now on my very very short list of favorite sentences…

  4. ‘I’m rarely irritated or perturbed. Except, perhaps, by the presence of willful ignorance.” I’m putting this one in your classic line list…

  5. Still hopeful that someday I will read the Heisenberg autobiography, even if published under your now infamous pseudonym.
    Besides, publishing a novel or autobiography might work better for you than Tinder.

    1. The biggest impediment to this, honestly, is that I can’t figure out where to put it (or where to put them if I did it as a series of short stories).

      The apparel is much easier, because even people who are totally new to Heisenberg and therefore might “not get it” (so to speak) still understand that a lot of niche sites have apparel or a “shop” section. Like: “Well, I don’t get it right now, but I know everyone has apparel, and who knows, one day I might see a shirt or a print that looks particularly cool to me.”

      With the autobiographical stuff, it’s not as straightforward. For example, it might not be clear (at all) to some PM at a large asset management firm why this site has autobiographical fiction. A sizable percentage of my audience are those kind of folks — so, not your stereotypical “Wall Street” people, but rather your “regular,” straight-arrow types. I’m just not sure how autobiographical content would come across to those readers, which raises questions about where does it (the content) “live.” Is it on another section of the site? Is it totally separate? Etc. etc.

      1. I really enjoy the little bits you drop once in a while. It’s like a good mystery story or a radio play where one has to imagine what one is seeing or hearing. Besides, each bit carries not only “action” information but also implied philosophical leanings. A memoir of some kind would end the story all at once, as it were. I wouldn’t do it.

        My late wife and I had a very classy guardian angel (the women’s dean at our college) the last year we were still in school, after we had secretly eloped. This lady was a classic spinster with a deep Boston Brahman family history going back in the 1600s. She and her series of jet black standard poodles lived for 40 years where you are now. She was a quiet, inveterate beach walker. We loved her even though we only knew her a short while because she cared for us as if we were her children.

      2. I have said this before, but I will say it again.
        In the most respectful way, I can truly imagine an autobiography written in the style of Kitchen Confidential or Eat a Peach: A Memoir.
        Both are part personal history and part the story of their careers, intertwined. Hard to put down and one became a NYT bestseller.
        Your writing would outdo either.

  6. For the last 5-6 years I’ve been reading about how 10 year market returns are projected to be flat or negative, based upon a variety of valuing metrics…the $64,000 question is when the big waterfall drawdown will occur that kicks off this new paradigm…

NEWSROOM crewneck & prints