Bank of America Forecasts Negative S&P 500 Returns for Next Decade
Valuation signals indicate a -3% annual return for the S&P 500 over the next ten years.
Bank of America projects a -3% average annual return for the S&P 500 over the next decade. This estimate relies on a normalized price-to-earnings ratio currently set at 32. The bank released this data in a client note dated September 14.
The bank advises rotating into the S&P 500 equal-weighted index. This alternative metric suggests a +3% annualized return for the same period. The normalized PE ratio for the equal-weighted index stands at 25.
Valuation metrics explain most market variance
The normalized PE ratio explains roughly 80% of S&P 500 returns over a ten-year span. It serves as one of ten valuation gauges tracked by the bank. Six other indicators also point to negative performance by 2036.
These additional metrics include the Shiller PE ratio and price-to-book value. Market cap-to-GDP is another signal implying poor future returns. The average implied return across all ten signals is -1.4%.
Factors supporting current market resilience
Bank of America notes that historical valuation models may be too punitive. Equities often outperform bonds during stagflationary periods. S&P 500 companies currently maintain low debt levels and stable earnings.
The bank considers the cap-weighted index potentially more resilient than raw valuations suggest. High quality corporate balance sheets provide a buffer. This structural strength may mitigate some forecasted downside.
Investors can access equal-weight exposure
The Invesco S&P 500 Equal Weight ETF provides access to the recommended strategy. The ticker for this exchange-traded fund is RSP. It offers a cheaper valuation profile compared to the standard index.
GN auto markets/indices reported that the bank prefers this alternative structure. The primary driver is the lower cost basis. This creates a wider margin of safety for long-term investors.
