Many investors take it as a given that—since returns on the S&P 500 have been strong for 10-plus years—stocks are expensive and over-owned. The demographic headwind from the aging of the baby boomers is widely viewed as another impediment to equity returns.
But conventional wisdom is often wrong, and we think this is one of those times. Here we make a contrarian argument: A secular bull market for equities began in February 2016. We believe that annualized total returns should average in the double digits until 2033–2035. The S&P 500 could hit 10,000 by the mid-2030s.
In the following pages we present our analysis, which draws on four key observations:
The historical pattern of market returns suggests strong future returns.
Equity valuation is attractive relative to other assets.
A sustained period of weak equity inflows suggests high levels of investor pessimism, a bullish signal.
- Demographic trends in the labor force—mostly notably the rising ratio of middle aged (35- to 49-year-old) to young (20- to 34-year-old)—will be a tailwind for equities until the mid-2030s.
EXHIBIT 1: S&P 500 INDEX, LOGARITHMIC SCALE, 1927–JUNE 2019
Source: Robert Shiller, FactSet. Data shown in log scale to best illustrate long-term index patterns. The performance quoted is past performance and is not a guarantee of future results.