Global Equities: First It Was Valuations, Then Earnings, What’s Left? – June 5, 2023

A just-published report updated our long-run projections for all of the major global asset markets. The main conclusion was that real returns on global equities and G7 government bonds will be lower over the next 10 years than in recent decades.

The extremely strong real returns of recent decades were first driven by the steady decline in global interest rates and inflation during the 1980s-1990s, which generated huge bond market returns and significantly boosted equity market valuations. The tailwind behind stocks shifted to a dramatic improvement in corporate earnings thereafter.

The first tailwind, ever-lower interest rates, is over now that inflation is no longer in hibernation. Moreover, while we are not cyclically bearish on earnings, it is difficult to envision a repeat of the prior profit boom given the starting point of historically elevated profit margins.

Net: investors should expect subpar real returns on a multi-asset portfolio over the next decade as prior tailwinds become headwinds.


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