We anticipate that US equities will outperform long-dated Treasuries over the next ten years, even though the valuation of the stock market is even higher now than it was at the beginning of the 1930s and approaching its level at the outset of the 2000s – the only two decades in the past 100 years when US equities underperformed. The underperformance of US equities vis-à-vis long-dated Treasuries in the 1930s and 2000s (see Chart 1) followed the bursting of bubbles in the stock market. We don’t think we are in the latter stages of another bubble now, though, despite Shiller’s cyclically adjusted price earnings ratio (CAPE) for the S&P 500/ Composite being above its level on the eve of the Great Crash and only ever being exceeded in the final stages of the dotcom boom. A key reason is that the valuation of the stock market does not look stretched relative to that of the bond market. Some other hallmarks of stock market bubbles also appear to us to be missing, such as high leverage and major financial imbalances. The upshot is that, over the next ten years or so, we project that the real returns from US equities will still be positive (albeit less so than in the 2010s and 2020), whereas we forecast that those from long-dated Treasuries will be negative against a backdrop of a slow rise in nominal yields and inflation.
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