No. of Recommendations: 8
At an 18 multiple, that puts the index real price at 190 * 18 = 3420 at 2032 yearend.
This is the biggest wildcard.
Though that sounds entirely plausible as a number, and I have no particular argument with it, it's extraordinarily difficult to forecast what a "normal" market multiple might be in future.
I have given up making strong assumptions about the future normal valuation of the broad market, hedging all my thoughts and comments with "if it's like what has been typical since 1995..."Above are all good points. I will recalculate by bumping down P/E a few notches from 18 to 15 which is the average over the last 150 years according to
https://www.multpl.com/s-p-500-pe-ratio . It's not a strong assumption that it will be 15 ten years from now, but we need to pick a number, and selecting the very long term average seems reasonable.
Profit margins are also a wildcard. Historically they have varied between 6 & 12. In recessions, they are lower but that's temporary. There is a limit to how high they can go because labor and society in general will demand its pound of flesh from capital. They are unlikely to go very low either because technology improvements will continue to increase productivity for the foreseeable future. So let's settle down on 9 in the middle.
Recalculation
2022 yearend sales: 1816
2032 yearend real sales: 2108 (growing at 1.5 real per year)
2032 profilt margin: 9
2032 real earnings: 2108 * 0.09 = 190
2032 P/E multiple: 15
2023 real S&P 500: 15 * 190 = 2850
2023 Oct 3 price: 4229
10 year real CAGR: -3.87%
10 year real CAGR including dividends: -2%
The actual result will obviously depend on what the actual P/E multiple and profit margin turn out to be. However, if they turn out to be close to what we have assumed above, the result is not pretty. The 10 year TIPS which closed today at 2.45 will turn out to be a much better buy.
Although Jim has been saying this for years, it took me a while to realize that it's better to ignore the distraction of nominal interest rates and estimate future returns in terms of real rates.
Since we don't know what inflation will do, it's best to avoid nominal bonds. But TIPS for a portion of the portfolio is looking increasingly attractive. If holding till maturity, the price gyrations don't matter. A guaranteed 2.5% above inflation is not bad at all. One could easily end up doing much worse in pursuit of higher returns.
https://home.treasury.gov/resource-center/data-cha...
