JPMorgan Chase: Prepare for lower returns on US stocks over the next decade.

According to a model at J.P. Morgan focused on long-term market performance, the average annual return of the S&P 500 index may drop to 5.7% over the next decade, roughly half of the index's return rate since World War II. Reasons for bearish outlook on stock market performance in the next decade J.P. Morgan's pessimistic view on the future performance of the U.S. stock market is based on the fact that the current valuations of U.S. stocks, especially the seven major technology stocks, are already very high. A large amount of historical data suggests that valuations should revert to the mean in the long run, leading to a decrease in stock market returns in the coming years. The current price-to-earnings (P/E) ratio of the S&P 500 index is 23.7 times, 25% higher than its 35-year average of 19 times. Robert Shiller's cyclically adjusted P/E ratio is another valuation indicator used by the team, indicating that stock valuations are currently higher. However, as is often the case in the market, models rarely explain all situations. Therefore, the J.P. Morgan team has put forward some basic factors that could affect future stock market returns. The team believes that the most notable factor is the aging of the U.S. population. Older investors tend to avoid stocks and opt for more conservative investments such as bonds. With more and more Baby Boomers and Generation X retirees reaching retirement age, this could impact the average household's allocation to stocks. As shown in the graph below, this allocation is currently at historical highs. J.P. Morgan strategists Jan Loeys and Alexander Wise stated in a report, "Aging leads to more and more elderly Baby Boomers reducing their stock allocations, currently at historical highs, in line with their narrowing investment horizon." Since the early 1990s, along with several tax cuts by the U.S. government, globalization, and increasing market concentration, company profit growth has exceeded economic growth. But as the U.S. strives to reduce budget deficits and tax rates may rise. In recent years, both the U.S. and Europe have been strengthening antitrust scrutiny. Some investors believe that antitrust investigations could affect the profits of listed companies, thereby impacting their valuations. Strategists suggest that in the long term, U.S. political instability and de-dollarization could also lower stock returns. Although so far, neither has had a significant impact on the market. The J.P. Morgan team noted that the U.S. market seems to have ignored the steadily rising government budget deficit. But as foreign investors' enthusiasm for dollar-denominated assets wanes, this situation may change in the next five to ten years. The team warns at the end of the analysis: the above observations are only useful in the long term and should not be used to try to time the market. "Valuation...confirms its long-term holding return, but it is difficult to provide clear direction for investors in the short term, whether it is up or down." The S&P 500 index rose more than 24% last year and has risen about 18.5% year-to-date in 2024. This week, as traders await the latest interest rate decision from the Federal Reserve, the index is set to hit a new all-time high. The Dow Jones index is also poised to hit a new all-time high again. Cut by 50 basis points or 25 basis points this week? Mark Zandi, chief economist at Moody's Analytics, said, "I hope for a 50 basis point rate cut, but I doubt the Fed will cut by 25 basis points. I hope it's 50 basis points because I think rates are too high. The Fed has already achieved full employment and inflation targets, which are inconsistent with a Fed funds rate target of around 5.5%. Therefore, I think they need to normalize rates quickly and have ample room to do so." As of Wednesday afternoon Beijing time this week, Fed funds futures traders expect a 61% probability of a larger move, which is a relatively low level of conviction compared to previous meetings. Tom Simons, U.S. economist at Jefferies, said, "While austerity policies seem to have worked, they have not worked fully as expected by the Fed, so accommodative policies should be viewed with the same amount of uncertainty. Therefore, if investors are unsure, they should not rush into anything." Robert Kaplan, former president of the Dallas Federal Reserve Bank, told the media this week, "I guess there are some differing opinions within the Fed, some of whom, like me, think the rate cut is a bit late. From a risk management perspective, some people just want to be more cautious." This article is reproduced from the "Wind Wandai" official account, GMTEight editor: Jiang Yuanhua.