A lost decade in the stock market is likely as long as oil prices continue to trend higher, Stifel says

• Investors should be prepared for a lost decade of returns in the stock market, according to Stifel.
• The outlook hinges on commodity prices continuing to move higher throughout the decade.
• "If commodity soar (oil/war), then it's extremely unlikely the S&P 500 meaningfully rises," Stifel said.

While Stifel equity strategist Barry Bannister expects some upside to stocks over the next six months as inflation shows signs of easing and the market enters a favorable seasonal period, there is a much bigger risk to investors who have a longer-time horizon.

Bannister sees a lost decade hitting stock returns over the next decade, with the S&P 500 likely to trade at 5,100 in 2031, according to a Monday note. The bearish call hinges on the price of oil and other commodities, as higher commodity prices are likely to ding stocks amid persistent inflation.

"We do not believe inflation can fall or the S&P 500 can rise meaningfully without the stock market also outperforming the commodity index," Bannister said. "If commodities instead soar (oil/war), then it's extremely unlikely the S&P 500 meaningfully rises, based on all secular bear market precedents."

The scenario still calls for earnings growth, with expectations that S&P 500 EPS can double over the next decade, but multiples will crater due to the higher commodity costs. Bannister expects the P/E ratio to get cut in half between now and 2031.

"The 'tell' for this scenario will be if commodities are in a secular bull market, with higher highs and higher lows for 10 years, the only universally common feature of S&P 500 secular bear markets," Bannister said.

Also not boding well for future returns of the stock market over the next decade is the high equity ownership among households that peaked in 2021.

"When valuation and equity ownership are high (2021 was similar to 1968 and 1999), a weak S&P 500 decade follows," Bannister said.

To prepare for the potentially weak decade ahead, Bannister recommends investors own value stocks, as they should outperform growth for many (but not all) years. Additionally, small caps, defensive, and active management styles should be preferred by investors, according to the note.

Of course, Bannister acknowledges that there is an alternative scenario that plays out in which stocks don't fall into a lost decade and instead continue with their long-term rising trend. But for that to happen, oil prices and other commodities need to fall considerably, and given the high geopolitical uncertainty, that's not a sure bet.