Bears beware: A Wall Street strategist explains why the S&P 500 could spike 160% over the next 10 years
- Bernstein strategist Alla Harmsworth says the benchmark S&P 500 could soar to 8,000 in 10 years, defying other predictions that the market is due for a prolonged period of sluggish returns.
- There is a broadly held view on Wall Street that after a 10-year bull market in stocks, equities will offer weaker returns than their historic averages in the years ahead.
- The benchmark index closed at a record 3,025 on July 26, up 347% from its low point in March 2009 in the wake of the global financial crisis. A surge to 8,000 would be a roughly 160% increase from current levels.
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After a decade of stellar returns for stocks, there's widespread agreement that the next 10 years can't possibly be as good. Some say they might even be terrible.
The S&P 500 has climbed more than 300% since the bull market began, so it seems reasonable that it won't be able to replicate that feat so soon after. But one of Bernstein's top strategists questions that assumption.
Alla Harmsworth, the head of European quantitative strategy at the firm, says the index could hit the unheard-of 8,000 level 10 years from now.
One main part of Harmsworth's bullish argument stems from her belief that traditional valuation metrics - which have been flashing red for years - are flawed. She tackles the frequently cited Shiller PE ratio as particularly troublesome.
Harmsworth recalls that measure was signaling overstretched and vulnerable conditions as far back as a decade ago, which turned out to be a dramatically incorrect conclusion.
"If a framework is wrong for so long it needs to be rejected!" she wrote.
To back up that argument, Harmsworth uses chart below, which tracks the Shiller PE ratio and compares it to forward returns for stocks. While the forecasts have often been low, returns have clearly been good.
In Harmsworth's view, that's because fiscal and monetary policy interventions can override the indications the Shiller PE ratio is sending out. And she doesn't see that changing, as politicians might insist that central banks prevent returns from weakening because of the harm that could do to many people's pensions.
Limited choices
She uses another argument to predict another decade of strength for stocks, and it's similar to a recent market mantra: TINA, or "there is no alternative."
"The bottom line is that equities provide the best long-term hedge against inflation," Harmsworth wrote, adding that's been true for 150 years.
She says there's no reason to think it's going to change now. If stocks are still clearly a better hedging option than bonds and gold, that's going to support higher prices even if economic growth slows down over the long term, Harmsworth says.
Harmsworth's bull argument also works to dispel the idea that high existing household allocations to stocks will limit the market's upside. She says that might not matter because stock buybacks have turned into such a huge source of market strength. Even if repurchases slow down, companies are buying back so much stock that it wipes out selling by investors.
"This year traditional buyers of funds have sold $200 billion of global equities while corporates have announced $820 billion of buybacks (or $650 billion if we net off equity issuance) and $1300 billion of total M&A," she wrote. "The buying of equities by corporates has exceeded the selling of equities by investors 10-fold."