- MRB Partners is warning of weak future returns for stocks.
- Peter Perkins, the firm's global strategist, said high profits would be difficult to sustain.
- Stock returns over the last 10 years also show a likely slowdown in gains, he said.
High stock market valuations have sparked plenty of "lost decade" warnings over the last couple of years, but a new report from market research firm MRB Partners shows there may be a few more reasons to fear poor returns ahead.
"Our base-case forecast is that U.S. equity prices adjusted for inflation will be broadly flat over the next 10 years, which would be consistent with past cyclical performance," wrote Peter Perkins, the firm's global strategist, in a note to clients on Thursday.
In addition to citing valuation metrics like the S&P 500's trailing 12-month price-to-earnings ratio, its Shiller PE ratio, and total stock-market capitalization-to-GDP, Perkins laid out a few other measures that he thinks point to a rough patch of returns on the horizon.
First, he cited a rolling average of the S&P 500's 10-year compound-annual growth rate. The benchmark index has averaged about 10% annual returns over the last decade, near highs going back to at least 1880.
While earnings growth is what will drive future performance, Perkins pointed out that prices have been flat or negative over the next decade after such strong returns.
MRB Partners
Second, he highlighted surging US corporate profit growth, especially after taxes, over the last 40 years. He said the growth would be difficult to sustain or replicate, given how far corporate taxes have fallen.
"While after-tax margins may still have some upside in the future, the magnitude of any increase is unlikely to match that of the past four decades and, in fact, may be more likely to decline significantly rather than rise significantly," Perkins said.
MRB Partners
And third is return on equity, or ROE, which is another way investors measure profitability. The metric compares overall corporate profits relative to market cap.
The market's 12-month trailing ROE is currently at 20%, one of its highest levels ever and well above its mean of around 14.5% over roughly the past 40 years.
High ROE levels are a good thing — they indicate companies are generating cash and are financially stable. However, since the metric is near an all-time high, it's unlikely things can get much better from here, Perkins argues.
MRB Partners
The elephant in the room, of course, is AI. The technology promises increased productivity with fewer workers, translating into higher profits. It could be the panacea that keeps the party going for all of the above metrics, but the degree to which AI ultimately reshapes the economy remains to be seen.
For now, Perkins argues that history shows investors are set up for a disappointing decade ahead.
"The very strong performance of U.S. stocks over the past four decades is the result of unique events/circumstances that almost certainly will not be repeated over the next few years and decades," he wrote. "Buyer beware."
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