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The Easy Guide to Where Stocks Are Headed Next

An entire industry is devoted to guessing where the S&P 500 (SNPINDEX: ^GSPC) is headed next. And an entire industry almost always gets it wrong.

As I wrote last week, future market returns are not hard to calculate. They’ll equal the dividend yield plus earnings growth, plus or minus the change in valuation multiples.

The problem, of course, is that earnings growth is hard to predict, and the change in valuations is totally impossible to know. But while we can’t know exactly how the future will play out, we can make reasonable estimates within ranges.

Take the matrix below. It shows where the S&P 500 will be 10 years from now given various assumptions. For reference, the index currently trades at about 1,650.

easy guide to stocks headed

Source: Robert Shiller; author’s calculations.

Now, this doesn’t include dividends, but it also doesn’t adjust for inflation. It’s reasonable to assume that those two factors cancel each other out, so what we’re looking at here is likely close to total real returns.

Since 1950, S&P 500 earnings growth has averaged 5.9% per year, and the P/E ratio has averaged 16.7. Of course, the “average” doesn’t tell us much when looking at a span of history that bounces around between crushing lows and epic highs. “History doesn’t crawl; it leaps,” the saying goes.

But the next time you hear a market forecast, remember this table. The most honest forecast anyone can give for where stocks will be in 10 years is somewhere in there.  Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.  

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.   This article was written by Morgan Housel, and first published on fool.com