Now that this great 2013 is coming to an end, everyone is wondering what will follow in 2014. There is a formula that can help us frame our outlook. It goes like this:
Return = Dividend Yield + (1 + Earnings Growth) X (1 + P/E expansion/contraction) - 1
The following table uses this formula to peek into 2014. The cell highlighted in yellow - 6% earnings growth and an ending P/E of 15 - is the average long-term situation. In other words, if 2014 is "average" we'll see a 16% loss. But what if it's not average? The purple cells highlight a band around the average and indicate a performance range between a 13% gain and an 18% loss.
Return Forecast for 2014 (1 Year)
Source: PPCA Inc
We can also use the same formula to look beyond 2014, to the end of the decade, as shown in the following table:
Return Forecast for 2014-2019 (6 Years)
What do you think 2014 and beyond will bring?
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. I have no business relationship with any company whose stock is mentioned in this article.