Predicted 10-Year returns from the Shiller P/E

A quick update on the Shiller P/E predictions–been a slew of articles/research on this recently:

We’ve written fairly extensively on the topic of predicting future returns:

Here is an article we wrote up describing Hussman’s model:

John Hussman has an interesting piece on predicting long-term market returns

The article is a bit dated (2005), but still fascinating.

In the short piece Hussman suggests that the projected annual total return on the S&P 500 over T years can be represented with the following equation:

  • Long term total return = (1+g)(future PE / current PE)^(1/T) – 1 + dividend yield(current PE / future PE + 1) / 2

He makes the following assumptions and plugs them into the equation above:

Peak to Peak earnings growth, g=6%

T=10 years

future PE (E=Peak Earnings over cycle) range between 20 (major bull) and 7 (major bear)

Here are the results of our analysis of this model:

Low-end prediction is -0.84% 10-Year CAGR; high-end prediction is 7.61% 10-Year CAGR

We also have a piece that is related to predicting 10-year returns with a simple regression model:

The model is predicting a 3.31% 10-Year CAGR.


Expect 10-year returns to fall in the -.84% to 7.61% range over the next 10-years. Not too precise, but at least you can scratch off your prior expectation of 20% CAGR…

About the Author

Wesley R. Gray, Ph.D.Better known as "The Turnkey Analyst, Ph.D.", Executive Managing Member, Empiritrage, LLC, Assistant Professor of Finance, Drexel University’s LeBow College of Business, United States Marine Corps, Captain, Ground Intelligence Officer, Published author; featured speaker, author, and lecturer at numerous venues (top-tier universities, museums, radio, and television), Ph.D./M.B.A. Finance, University of Chicago Booth School of Business, B.S. The Wharton School, University of Pennsylvania, magna cum laude Wes' homepage is at all posts by Wesley R. Gray, Ph.D. →

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