John Mauldin, the author of the NY Times top ten best-selling investment book, “Bull’s Eye Investing” and the President of Millennium Wave Investments sets out to prove that in ten years' time the US stock market will likely be no higher than it is now, and possibly significantly lower.
The stock market's future level will be determined by
(a) earnings growth and
(b) the value the market places on those earnings (ie. P/E ratios),
so Mauldin focuses on these two elements.
First, he argues that earnings growth will be disappointing. Companies' earnings will be depressed by the adoption of stricter accounting standards, the expensing of options, and higher pension costs. Combine that with anemic economic growth due to the aging of the population, the current account deficit and the budget deficit, and earnings are unlikely to exceed their historical growth rate of under 6%.
Next, Mauldin argues that P/E ratios are unlikely to rise over the coming decade, and may in fact fall dramatically.
He assembles a battery of arguments to prove his case.
Secular bull markets have never started from times when the market's P/E ratio was as high as it is today. The market is currently overvalued according to multiple measures, and will likely revert to its historical mean. The risk premium is currently low, and a recovery to more sensible levels would depress P/E ratios.
Finally, P/E ratios fall as inflation rises or an economy slips into deflation; so given the US economy's current inflation rate (close to zero), there's nowhere to go that would result in a higher P/E ratio for the market.
With mediocre earnings growth and falling P/E ratios, the market is therefore headed nowhere or a lot lower.
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