So, what can North American investors expect out of the stock market over the long term?
Let’s start with the next decade. There are a number of ways to approach this question. In this report, we focus on two of the more prominently featured methods found in finance literature. The first is based on the historical relationship between P/Es and future stock market returns. The second uses an accounting-based methodology, which breaks the return on investment into its different components. The findings based on these two methodologies are very similar, and are briefly highlighted below: • P/Es are strongly and inversely related to subsequent long-term returns. With the help of a simple regression model, we estimate that the S&P 500 at current valuations is priced to deliver about 0.4% in total return terms per annum over the next decade. Unfortunately, we could not conduct a similar exercise for the Canadian market due to the lack of historical data. • An accounting-based approach delivers an expected annualized total return of 2.7% for the S&P 500 and 2.9% for the TSX Compo
