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.

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.

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  • Report this Comment On June 01, 2013, at 12:45 PM, EDJMCPS wrote:

    What drives are economy? Spending, as people spend money they create profits, earnings are reported and stock prices follow earnings. You have to look at the top spenders and age groups usually in there 40's. We are entering a period of decline as the baby boomers leave this market. Future demographics on ageing people show a flat cycle with a dip about 2016 to 2018. I am not expecting much to change over the next decade and would look at 0% growth. There will not be the same amount of people to support what the past decades were driven by. Just my thoughts.

  • Report this Comment On June 01, 2013, at 3:20 PM, mohamedziauddin wrote:

    Consumer spending is the engine that drives the economy.But,unfortunately consumers are not spending any money because of diminished consumer confidence and lack of job security.

    . People are keeping their cars, washer,dryer etc. for longer time.

    I don't see any way out of this catch-22 situation.

    Any suggestions, fellow fools?

  • Report this Comment On June 01, 2013, at 3:25 PM, TMFMorgan wrote:

    <<But,unfortunately consumers are not spending any money because of diminished consumer confidence and lack of job security.>>

    Consumer spending is the highest it's ever been, even adjusted for inflation.[1][id]=DPCERX1...

  • Report this Comment On June 01, 2013, at 3:43 PM, devoish wrote:

    I am with the first to replies. I'd like to see you consider some negative earnings growth rates

    Best wishes,


  • Report this Comment On June 01, 2013, at 7:08 PM, optimist911 wrote:

    If "an entire industry almost always gets it wrong," then I have a startling new strategy that will almost always get it right: Just do the opposite of what that industry is suggesting. There -- I just assured my own wealthy retirement and helped out any other reader lucky enough to stumble across my revelation.

  • Report this Comment On June 02, 2013, at 8:55 AM, proplumb wrote:

    Consumer confidence is up and consumer spending is down. Go figure?

  • Report this Comment On June 02, 2013, at 10:32 PM, mikecart1 wrote:

    Stocks are headed down next whenever people realize that unemployment numbers are a joke, the flooding of money to help these sorry businesses like AIG is going to stop at some point, and that the US continues to fall slowly in world rankings on education and innovation. It doesn't matter if it is DOW 15,500, 16,000, 17,000. In the end, the market will be lower than it is today - possibly much lower - until things really are fixed.


  • Report this Comment On June 03, 2013, at 8:08 AM, Jamesband wrote:

    But it's a global economy isn't it? Our government may turn us into socialist Europe, but there are 17 other countries who now exceed the US in economic freedom and liberty. Our socialist education system has crushed our individual independence economically, nearly 50 percent of the US citizenship is dependent, yes dependent, on the government to live i.e. serfs, and they like it this way. We’ve lost it, but nearly 17 other nations have picked up where we left off and are thriving. That’s where the global economy is strong, that’s where we invest.

  • Report this Comment On June 03, 2013, at 8:58 AM, NickD wrote:

    Go they should go down cheaper retirement.

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