The Congressional Budget Office releases forecasts for how much the economy can grow, presumably without causing unwanted inflation. The latest forecast for nominal GDP in Q4 of 2023 is $26.58 Trillion.

Source: Fred Data

One can also find that last quarter's nominal GDP was $15.85 Trillion.

Source: Fred Data

One can then simply find the expected growth rate over the next 11 years using excel. Just paste in:

=rate(11,0,-15851.2,26579.5)

And excel will spit out the answer of 4.811% annual nominal GDP growth.

The questions to investors this brings up is:

How will the stock market in general achieve significant gains above this rate?

How much of this growth is already discounted by interest rates?

The answer to the first question is that substantial gains are unlikely to occur, if the nominal GDP "target" is accurate. First, let's look at the total returns of the S&P 500, SPY, from June 1988 - December 2012. Getting the data downloaded one can compute that the average total return over this time frame was 9.80% for the S&P 500.

Then one can look at the growth of U.S. nominal GDP. It was 4.98% over this time frame (I measured Q2 1988 - Q4 2012). Now, a type of "risk premium" can be made from this:

9.80% - 4.98% = 4.82% Risk Premium

If this same risk premium occurs in the future, then one would expect total returns of 4.81% + 4.82% = 9.63%

However, now we must consider the second question, "How much is this discounted?" Obviously zero interest rates discount all values from the future. On the other hand, high rates mean that values are to be realized in the future. In the last six months of 1988, the average U.S. Treasury, 10-Year, constant maturity treasury [CMT] rate was 9.0%.

But this is only for 10 years not 25 years into the future. So we look up the 30-year U.S. Treasury CMT rate in 1988 and it was 9.1% on average. Also, back then the 30-year was the "bench mark" rate. I would guess that a 25-year bond would have a yield slightly less, but if one allows the use of the 30-year rate, one would have only received a risk premium of .7% over 25 years. If one chooses the 10-year rate then a .8% risk premium was achieved. I would guess the 25-year bond would be somewhere in the middle.

In 2012, the 30-Year CMT had an average yield of 2.9% and the 10-Year CMT had an average yield of 1.8%. If the same risk premium occurs for the 10-year 1.8% + .8% = 2.6% return. The 30-Year equity risk premium return would just be a 1% higher at 3.6%.

Bulls will have this headwind against them for the foreseeable future. The difficulty is that such a large portion of future values are already discounted. At 9.0%, for a 10-year bond, the prevent value [PV] of $100 is $42.24. The PV of a 10-year bond at 1.8% is $83.66. The PV of a 30-year bond at 9.1% is $7.33. The PV of a 30-year bond at 2.9% is $42.42.

From, 2009-2012, the SPY averaged total returns of over 14.9%, but now this low hanging "discount" fruit is gone. High, single digits are the best to be hoped for if the nominal GDP "risk premium" approach is used. However, typically the equity risk premium is built off of treasury bond yield and this suggests returns over 10% less than received during the last four years.

Present value helps bulls when rates fall, but it's a pain with flat rates at the zero bound, or, heaven forbid, rising rates. Investors would be wise to adjust expectations lower, despite any new, nominal high in the Dow Jones Industrials.

**Disclosure: **I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.