Investors have become so optimistic about the future returns of the stock market, that at least one observer feels worried that we could soon enter the “euphoria” stage of the market rally. This typically signals the top of the market.
In his latest article for MarketWatch, Bretty Arends said there’s only thing higher than the stock market right now. That thing is average investors.
He says there’s no other way to explain how a recent survey of 1,500 self-directed investors found that the average person expects the stock market to generate 15.4% a year over the next five years.
“This forecast was the average in the survey. Heaven knows what the optimists expect,” said Arends.
He says that after you account for dividends, stock prices would have to nearly double in the next five years in order to generate those returns. That would put the S&P 500 above 6,000 and the Dow Jones Industrial Average above 52,000.
“If that happens we can all achieve “Financial Independence” and “Retire Early” to the beach. Just in time for the robots, artificial intelligence and self-driving cars to do all the work.” said Arends.
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Schroders, a global money-management firm, conducted the poll that Arends references. The firm surveyed 23,450 private investors in 32 countries around the world. Approximately 10% of those surveyed were already retired, and the remaining 90% were presumed to be saving for retirement.
U.S. Investors Optimistic
Investors here in the US were the most optimistic – or Arends said possibly the most deluded. This is compared to the rest of the world. The Japanese investors surveyed expect returns to become less than half of what US investors expect.
So how likely are we to get 15%+ returns over the next five years?
“Almost anything can happen on Wall Street, and generally does, so this is not a mathematical impossibility,” said Arends before adding, “But, well, good luck.”
“That would mean that U.S. stocks, already valued at a wacko 43% of the entire planet’s GDP, would rise to 60% or even 70%.” he said.
Based on data going back to the 1920s, the stock market has an average compound return of about 6.5% a year on top of consumer price inflation. With no inflation today, and none expected over the next five years, that means investors expect stocks alone to produce a return that is double their historical average.
“Never mind that the S&P 500 is now trading at 25 times 2021 per-share earnings, 33 times the average earnings of the last 10 years, and somewhere between 1.5 and 2 times the replacement cost of assets, known to economists as Tobin’s q.
“All three historic measures have long-term track records of anticipating future returns. None is perfect, and each is up for debate. But by all three measures S&P 500 valuation today is up in the nosebleed section.
“It’s one thing to produce terrific stock-market returns from a low base. It’s another to produce them when stocks are already expensive.” said Arends.
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Arends points out that it’s typically a warning sign when such a large number of investors are this bullish.
“It is, ominously, generally near market peaks when investors are most bullish. Whether we’ll have a crash or a bear market is another matter.
“Yes, 15% could technically happen. But I wouldn’t bet on it.”