Investors who’ve gotten used to double-digit gains for US stocks may be sorely disappointed by what happens in the next five to 10 years, according to four market pundits.
But going forward those healthy returns will be harder to come by. Several macroeconomic factors that boosted stocks following the worst of the financial crisis will become headwinds in the mid- to late-2020s, several strategists and fund managers have recently warned.
“We expect a range-bound S&P 500 in real terms to continue into the early 2030s,” wrote Stifel equity strategy chief Barry Bannister in an early December note about his views for 2024.
Bannister added that there will be “weaker overall S&P 500 index returns than the growth-led 14.1% annualized real total return (after inflation, with dividends reinvested) experienced in the decade 2011-21, a high level of returns that we believe is gone for a generation.”
Stifel
Damanick Dantes, a global markets portfolio strategist at Global X, seconded that sentiment. Last month he said that investors should lower their expectations about future stock returns.
“You’re not going to get the same returns that you got out of a Covid situation or what you got when rates were artificially suppressed for a very long time,” Dantes said.
Why the future will bear little resemblance to the past
After the market crash in 2008, the US central bank slashed interest rates to jumpstart the economy by encouraging spending and investment. Rates rose modestly for a few years but remained near zero for most of the decade.
Contrary to what many economists expected, both growth and inflation remained lackluster. The stimulus meant to revive growth had less of an impact than anticipated, though efficient international trade caused by globalization was a silver lining.
The next five years will be almost a mirror image of that backdrop, said Peter Bates, the global select equity strategy portfolio manager at T. Rowe Price, at a mid-November conference. He’s preparing for a continuation of current trends, including elevated interest rates in response to steady economic growth, sticky inflation, and a tight labor market.
“In a world, the next decade, where you have higher rates, higher inflation — there is an alternative to equities, and I think that has broad implications for the asset class,” Bates said.
Dantes agreed that interest rates will stay well above pre-pandemic levels, which will limit gains.
“We’re definitely entering a new regime, and I think the wake-up call was in 2022,” Dantes said.
Stocks got crushed last year as the Federal Reserve rapidly hiked rates in response to surging inflation. The Fed long downplayed the price growth as transitory, given that inflation was minimal during the recovery from the financial crisis.
Unfortunately, US prices rose at a rate resembling the mid-1970s, which First Eagle portfolio manager Matt McLennan believes is no coincidence. The 32-year market veteran behind a leading global fund thinks that period of history may repeat itself, which is why he’s preparing for higher-for-longer interest rates and inflation. Such a backdrop in the next decade would require adjustments.
“If there is a regime shift, then what has worked could be quite different from what does work,” McLennan said.
3 ways to invest in the mid-2020s
Although some US stocks may struggle in the coming years, Dantes and McLennan each outlined a pair of investments that should perform well.
Infrastructure-oriented stocks are worth including in a balanced portfolio, Dantes believes, since they’ll benefit from new laws that will provide hundreds of billions of dollars in funding, as well as waves of reinvestment in US factories given rising global tensions, including with China.
Otherwise, non-US equities seem like a strong bet in the medium term since they’re trading at an “extreme valuation disconnect” versus their domestic counterparts, Dantes said.
“There’s still a lot of opportunities from a valuation standpoint that could become attractive within the next two to three years,” Dantes said. “Barring, of course, that we don’t enter an extreme growth slowdown that impacts negatively on the international front.”
Dantes added the following about the group: “It’s tough to time those things, but valuation gives you at least something to where you don’t want to be extremely underweight. Perhaps moving more neutral to slightly overweight over time could allow you to sort of rightsize that opportunity.”
McLennan is also focused on international stocks, particularly those that are high quality and trade at reasonable valuations. Foreign stocks tend to outperform in higher-rate regimes, he said, adding that he favors companies with stable margins that can generate robust cash flow.
Outside of equities, McLennan is bullish on gold. The yellow metal has been on a tear lately, as it’s close to record highs after rising about 10% since early October. That optimism is built on the belief that interest rates will fall next year, but McLennan’s thesis for the commodity centers around its ability to act as a hedge against weak growth — not to mention geopolitical risks.
