Author Topic: Where will S&P 500 end up in 2030?  (Read 2789 times)

vinod1

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Where will S&P 500 end up in 2030?
« on: June 08, 2020, 09:14:11 AM »
I have decided to make a fool of myself and put together my estimates for where S&P 500 would end up in year 2030 and 2040.

http://vinodp.com/documents/investing/Expected%20Market%20Returns%20from%202020.pdf

There is nothing new to those who have followed Philosophical Economics blog. That is truly a gem and most of you would find that blog more helpful.

I know most of us are supposed to completely ignore the market. But I think having some idea of what the market returns are likely to be is very important. First, it sets up a baseline return that could be used as the opportunity cost when looking at any other investment. Second, it seems to me that ignoring your main "the enemy" might not be prudent.

The overall stock market and S&P 500 is a very good approximation, is vastly lower risk than any single company. So unless, the individual stock is offering a significantly higher return, the risk reward in the individual stock simply would not be good enough to make it into my portfolio. Hence, my attempt at understanding the expected market returns.

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger


Jurgis

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Re: Where will S&P 500 end up in 2030?
« Reply #1 on: June 08, 2020, 09:49:13 AM »
I did not go in depth through your calculations and assumptions yet.
With simple DCF model stolen borrowed from Brooklyn Investor, plugging in ~130 earnings, 10 years DCF, 5% growth, terminal 15 P/E, results in 10% return from 2200, 8% return from 2500, and 5% from current levels (~3180). I think that matches your numbers approximately. 8) (Yeah, I know adjust for Covid and all that.)

Thanks for posting.  8)
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SHDL

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Re: Where will S&P 500 end up in 2030?
« Reply #2 on: June 08, 2020, 06:18:01 PM »
I do this type of analysis too for the same reasons and my numbers generally agree with yours.

One thing I do differently is instead of truncating the investment horizon at 10-20 years I just let it go to infinity and ask what would be my IRR if I were to buy the index and hold it forever (and replace buybacks with dividends).

The basic formula is:

Real IRR = (1-g/r)*y + g

g = long term growth rate of real earnings
r = long term average ROE
y = normalized earnings yield

Using historical numbers and some educated guesses for the parameters I have an estimated range of around 3-6% (assuming the virus doesn’t result in any serious long term impairment).

One nice thing about this method is that you don’t really need to think about terminal valuation multiples when estimating your IRR. (They are basically implied by the fundamental parameters above.) Also interest rates don’t enter the formula. Instead you estimate your IRR first and then you compare that with bond yields and such. I think this makes the analysis conceptually cleaner and helps you avoid nonsense like “interest rates are zero/negative so therefore stocks must be worth infinity.”

(Of course if you know you are going to sell your stocks after 10 years or whatever this is not really the formula to be using.)
« Last Edit: June 08, 2020, 06:21:52 PM by SHDL »

AzCactus

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Re: Where will S&P 500 end up in 2030?
« Reply #3 on: June 09, 2020, 02:33:06 PM »
Higher

Gamecock-YT

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Re: Where will S&P 500 end up in 2030?
« Reply #4 on: June 10, 2020, 05:39:16 PM »
1,000,000






samwise

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Re: Where will S&P 500 end up in 2030?
« Reply #5 on: June 10, 2020, 06:45:34 PM »
Vinod,

See https://www.msci.com/documents/10199/a134c5d5-dca0-420d-875d-06adb948f578

GDP growth can relate to aggregate income growth, but not eps growth. The estimated impact is 2% across many markets.

Reasons can be raising capital for growth investments, or paying for index inclusion or IPOs of new companies.

Also makes sense at an individual company level. Most companies will actually grow less than GDP. That’s how agriculture and then manufacturing became smaller parts of the GDP. Very few companies will exceed GDP for longish periods.

vinod1

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Re: Where will S&P 500 end up in 2030?
« Reply #6 on: June 12, 2020, 08:13:55 AM »
Vinod,

See https://www.msci.com/documents/10199/a134c5d5-dca0-420d-875d-06adb948f578

GDP growth can relate to aggregate income growth, but not eps growth. The estimated impact is 2% across many markets.

Reasons can be raising capital for growth investments, or paying for index inclusion or IPOs of new companies.

Also makes sense at an individual company level. Most companies will actually grow less than GDP. That’s how agriculture and then manufacturing became smaller parts of the GDP. Very few companies will exceed GDP for longish periods.

Terrific point! I have been reading Dimson, Ritter, Arnott, and Bernstein's research for a very long time.

Agree completely. Especially point about weak negative correlation between equity returns and GDP growth.

I had thought about these points but chose to skip over them and instead incorporate a somewhat weaker growth than can be justified purely from a GDP growth basis.

I think the best we can say about GDP growth and EPS growth is that in the long term a positive GDP growth is essential for EPS growth. But GDP growth by itself does not correlate with EPS growth for all the reasons they mention.

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

Cigarbutt

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Re: Where will S&P 500 end up in 2030?
« Reply #7 on: June 12, 2020, 09:11:56 AM »
Vinod,
You may already be aware of the following link:
https://thereformedbroker.com/wp-content/uploads/2012/08/Explaining_Equity_Returns_GMO.pdf
Exhibit 4, which is somewhat noisy, needs an update and it's unlikely that the long-term relationship of those variables has broken down. At least, that's what Mr. Buffett implied when he closed his partnerships in the late 60s and when he wrote his 1999 market environment article.
i've book-marked this thread to have another look in 2030.

vinod1

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Re: Where will S&P 500 end up in 2030?
« Reply #8 on: June 12, 2020, 06:34:53 PM »
Vinod,
You may already be aware of the following link:
https://thereformedbroker.com/wp-content/uploads/2012/08/Explaining_Equity_Returns_GMO.pdf
Exhibit 4, which is somewhat noisy, needs an update and it's unlikely that the long-term relationship of those variables has broken down. At least, that's what Mr. Buffett implied when he closed his partnerships in the late 60s and when he wrote his 1999 market environment article.
i've book-marked this thread to have another look in 2030.

Thanks Cigarbutt for the link.

I am skeptical about this relationship. Assume for example in the past, a GDP of $100 needed $50 of capital investment. In that case profits of 3% of GDP, would generate 6% return on capital. Seems like a fair return. Now assume as the economy changed, it now needs $100 of capital investment to keep up that same $100 of GDP. Then profits have to increase as a percentage of GDP to ensure that those providing capital generate adequate returns.

So to me it does not look like there is any fundamental economic logic to say profits need to be a certain percentage of GDP. Especially does not seem to be useful in any attempt at divining the market attractiveness. I understand Buffett's case but it always seemed to me to be one of his weaker arguments.

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

vinod1

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Re: Where will S&P 500 end up in 2030?
« Reply #9 on: June 12, 2020, 06:41:29 PM »
Also regarding EPS growth not strongly correlating with GDP growth, the major flaw with most of these arguments is poor data. There had been heavy emphasis on dividends for several decades early on in the stock market history and there has been a transition to stock buybacks from the 1990s onward. This causes several problems.

The link below is one article among many that explores this issue.

http://www.philosophicaleconomics.com/2015/03/treps/

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger