Bullish or Bearish, Long-Term Forecasting Is a Folly

The S&P 500 is clocking round numbers and record highs, corporate earnings are growing, and there is ample talk of a pro-business White House adding tailwinds for years—buy! So say some. But every action has an equal and opposite reaction, so of course there is also a loud chorus saying valuations are too high and returns for the next several years will be weak. Who is right? In our view, none of them. We are bullish for now, but long-term forecasts are a fool’s errand. Beware.

Whether bullish or bearish, none of the factors people cite can help you predict where stocks will go over the next 5, 10 or more years. Stocks, like all assets, move on supply and demand. Forecasting stocks in the long run therefore requires knowing how stock supply will evolve, which is impossible. A multitude of factors affects business creation, not to mention the decisions to go public, conduct stock-based mergers, buy back shares and accept buyouts or otherwise go private. It depends not just on regulations and the political backdrop, but also the economic environment (which is a lot less influenced by politics than either major US party claims), the principals’ appetite for risk taking, market sentiment and so much more.

Demand, too, is difficult to pin down beyond the next 30 months or so. And none of the factors people cite now have a repeat, predictable effect on it. Tax cuts and other supposedly pro-business policies? Nice in theory, but not uniformly bullish. If hopes get too high and the changes are smaller than expected, disappointment may reign. If changes pass narrowly, it could simply extend uncertainty, courtesy of the prospect that a future Congress could just change things back. Ping, pong, flip, flop, stocks don’t like such uncertainty.

Similarly, with valuations—whether traditional price-to-earnings ratios or the cyclically adjusted version (price versus 10 years of inflation-adjusted earnings)—it seems logical to presume high means “pricey” and “sure to drop or disappoint.” But market history is rife with examples of seemingly pricey stocks and indexes getting even more expensive as investors become ever-more willing to pay more for future profits. We also have myriad examples of stocks getting less “expensive” even as share prices keep rising, thanks to growing earnings. We also have the inverse, where cheap stocks keep getting cheaper. It is a hodge podge and yields only one logical conclusion: Valuations aren’t a timing tool. Not in the short run. Not in the longer term.

Even knowing which of these camps is right about the next several years wouldn’t help you now. Stocks are cyclical. There are bull markets and bear markets (deep, long declines of -20% or worse, typically with fundamental causes). One forecast making the rounds Monday morning envisioned the S&P 500 price index hitting 10,000 by yearend 2030 (it hit 6,000 today, making this a forecast for a 66.7% price return in the next 5 or 6 years). Sounds nice! But it is entirely possible the index could get there with a nasty bear market striking at some point within the window. Or, if the weak-returns crowd is right, it could very well be because a bear market struck at the exact wrong/right time to make 10-year returns look meh. In both cases, we would have good years and bad years. None of the rhetoric or tools in headlines now tell you when the good and bad years will strike.

Don’t get us wrong. Long-term returns matter. They are why we all invest! But the long endeavor of investing is all about navigating the ups and downs along the way. In a decade with lean cumulative returns, that means maximizing the likelihood of participating in the bull markets along the way and not letting the bad times dissuade you from trying to reap the good. And in a decade with strong cumulative returns, investing is all about … maximizing the likelihood of participating in the bull markets along the way and not letting the bad times dissuade you from trying to reap the good. Same thing! Bull markets and bear markets.

Ultimately, what matters most for investors is the cumulative return over their entire time horizon and whether it is sufficient to meet their goals. For most folks, that means their entire life expectancy—plus more if the assets are also meant for a spouse, heirs or charitable bequest. Returns over a short window within this long stretch are largely arbitrary. Take any investor’s portfolio over 20, 30 years or more, and you can probably cherry-pick a 10-year run with subpar cumulative returns and a great six-year window. They may even overlap, if you have brutal two-year bear markets sandwiching a stellar six-year bull market.

We get that sequencing matters to folks taking cash flows and to those with short time horizons, so we won’t write this all off as trivia. But in the grand scheme of things, the impossibility of forecasting far-future returns means it comes quite close.