High stock market valuations have led to numerous warnings about a potential “lost decade” for investors, and a recent report by market research firm MRB Partners underscores these concerns. The firm’s global strategist, Peter Perkins, shared insights indicating that U.S. equity prices, when adjusted for inflation, are likely to remain broadly flat over the next decade, mirroring past cyclical market performances.
In his note to clients, Perkins references several valuation metrics, including the S&P 500’s trailing 12-month price-to-earnings ratio, the Shiller PE ratio, and the total stock-market capitalization-to-GDP ratio. One significant measure highlighted is the 10-year compound annual growth rate of the S&P 500, which has averaged around 10% in the last decade, a figure that approximates historical highs since 1880. Perkins cautions that following such robust returns, market performance over the ensuing decade has frequently been flat or even negative.
Additionally, Perkins addresses the marked increase in U.S. corporate profit growth after taxes observed over the last 40 years. He argues that sustaining this growth will be challenging, especially given the substantial declines in corporate tax rates during the same period. While there may be some future upside for after-tax margins, he believes any increases will not match the scale seen in previous decades and that a decline is more probable.
Return on equity (ROE) is another crucial metric Perkins examines. The current 12-month trailing ROE stands at 20%, one of the highest readings on record, significantly above the long-term average of approximately 14.5% over the past 40 years. While high ROE levels typically signal strong corporate profitability and financial stability, Perkins warns that it is unlikely for ROE to improve much further from its current peak.
The advent of artificial intelligence (AI) introduces an element of uncertainty to these projections. While AI has the potential to enhance productivity and profitability by enabling companies to do more with fewer workers, the extent of its economic impact remains uncertain. Perkins notes that while AI could offer a solution to some of the challenges faced by the market, historical trends suggest that investors might be in for a disappointing decade ahead.
He concludes by stressing that the extraordinary performance of U.S. stocks over the past 40 years has been driven by unique conditions that are unlikely to recur soon. “Buyer beware,” he advises, urging caution in the current investment landscape.
