mickeyd
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Article suggests that future long term real rate of return of the US stock market is really 5%. Says that Jeremy Siegel was too optimistic at 7%. This study used earnings yield to forecast future stock market returns.
Reasonable ExpectationsBut clearly, the stock market does not provide a consistent return every year. If you expect to get Siegel’s 7% year-in and year-out, or any other static return number for that matter, you will be very disappointed. Sometimes the return of the stock market is higher and sometimes it is lower, but it is rarely, if ever, equal to its long-term historical average.
Our research suggests, instead, that the future long-term real rate of return of the U.S. stock market is actually closer to 5%. This conclusion does not flow from a more granular slicing and dicing of historical data. Rather, it flows from our effort to identify a reliable method for finding future expected returns when markets are always changing. Our goal was to find a better way than to simply use historical averages.
The starting place for our quest was the Gordon growth model, a classic model for fundamental stock valuation. Our examination of that model led us to conclude that the earnings yield (the inverse of the more popular price-to-earnings ratio) might provide a good estimator of future stock market returns.