For example, as baby boomers start to sell their equity assets to make ends meet, where are all the new buyers going to come from and if there are fewer new buyers it would seem that many will be in for a horrific surprise.
I was looking for reliable immigration adjusted birth rates, with the intention of cross referencing population growth trends with market performance. So far, I have not found the birth rates back to the early 1800s that I am looking for. If you find some, let me know and I will plug them into an Excel spreadsheet.
It seems likely to me that the boomers saving for retirement are the primary cause of today's expanded valuations. The large size of the cohort, combined with changes in the tax code (401k) that force boomers to put the growth portion of their 401k money into equities has increased demand for equities. Defined benefit plans also are legally constrained in what they can invest in, and put a lot of money into equities. In 1950, pension plans of all types held .8% of US equities. By 1988 they held 27.3% of all US equities. This is quite a jump, and represents a lot of buying pressure.
Of course, if President Bush succeeds in directing part of the payroll tax into equities, this could intensify demand for equities enough to at least partially compensate for the boomers (and the defined benefit plans that serve them) cashing out. Foreign demand for US equities will depend a lot on what alternatives they may have available. If the boomers moving out of their prime spending years leads to stagnation like in Japan, US equities might not be too popular. This could lead to multiple contraction.
I agree that immigration could help a great deal during this time. A lot of young immigrants would not only pay US taxes, but also increase demand for US investments. Importantly, they would keep the economy growing strongly by creating demand for the output of US corporations. Profits would be able to continue to grow at a decent clip. Of course, future politics is hard to predict, but our nation is much more accepting of foreign immigration than Japan is. I would expect more immigration than Japan allowed when their baby boom retired, but maybe not enough to get us painlessly through the boomer's retirement.