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The Overvalued S&P 500 Signals Low 10-Year Forward Returns: Update 8/1/2021

Aug. 01, 2021 12:22 PM ET10 Comments
Georg Vrba profile picture
Georg Vrba


  • The average of S&P 500 for July 2021 was 4364 (previous month 4238). This is 1894 points higher than the long-term trend value of 2470.
  • The current percentage difference of S&P 500 level relative to the current long-term trend level is 77%, a value not exceeded in the recent past since 2001.
  • The Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) is at a level of 37.6. That is 50% higher than its 35-year moving average (MA35), currently at 25.1.
  • The CAPE-MA35 ratio is 1.50, forecasting a 10-year annualized real return of about 3.9%. Should the CAPE-MA35 ratio increase further, then 10-year forward returns will be even lower.
  • The historic long-term trend indicates a 10-year forward real annualized return of only 0.7%.

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This is an update to our series of articles started in 2012 assessing market valuation and estimating forward stock market returns. The most recent previous update was for end of May 2021.

The projections

This article was written by

Georg Vrba profile picture
Georg Vrba is a professional engineer who has been a consulting engineer for many years. In his opinion, mathematical models provide better guidance to market direction than financial "experts." He has developed financial models for the stock market, the bond market, yield curve, gold, silver and recession prediction, most of which are updated weekly at http://imarketsignals.com/.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (10)

Been hearing that my whole life.
Obi-Wan profile picture
History often repeats itself, the market is full of patterns of whatever one wants to see or find. Only history makes them look genius, or foolish.....
Conclusion: the market goes up, down and sideways, but don't try to time it with any precision. Trim your losers, add to quality over time.
Market Map profile picture
One of the most difficult endeavours in investing has been attempt(s) at forecasting periods of subpar forward returns for the U.S. equity markets. The use of "valuation" metrics has been a popular ploy, and geopolitical events, ones that seemingly SHOULD have had an impact on the markets ( such as Covid pandemic ) failed to materially affect the markets. This may be that domestic markets and company earnings are driven be a high level of innovation, the internet / cloud based "tech revolution" that may only be in it's "5th inning", a Fed that is supportive and who is willing to "step in" and provide needed market liquidity at the slightest threat to economic growth.
However, in order to determine if and when a "systemic" market decline may be in the offing, an investor may be able to look to a robust history and repetition of phenomenon based on "data" derived from two simple variables: the four year Presidential term cycle and the "price" of the market benchmark in relation to it's "moving average".

Since 1933, negative forward market returns have correlated to periods when the SP 500 price has resided below it's moving average value ( monthly basis ) on June 30th of the given year AND those periods that have fallen within the first year of the "Presidential term cycle" ( Table 2
https://tinyurl.com/yyf48e4q ).

Systemic market declines ( declines whose duration is more than 18 months ) are rare beasts indeed. Table 1 in Appendix shows that only 11% of all July - June periods since 1933 produced double digit declines. Identifying 60% of those through a simple mechanical process is pretty reasonable.
As success in equity investing involves the uninterrupted hold of equity based assets for long periods, allowing for the compounding of dividends and corporate earnings growth, it is important to employ an objective, mechanical tactical method that intervenes, only rarely, in the holding process.

As 2021 is a first Presidential term year and with the SP500 price residing "above" it's moving average value on June 30th https://imgur.com/a/aOpRvzY , odds suggest that forward market returns will be positive.

Further, employing this simple strategy for 48 months, investment in the SP 500 produced higher returns in 94% of the 48 month periods since 1933, a statistically significant outcome. Chart 1 in Appendix
shows that only a handful of 48 month periods produced negative total returns, most periods of which occurred during the Great Depression. Further, investment over 96 month periods produced positive outcomes in 100% of the cases since 1933 ( Chart 2 Appendix ).
The current level of the S&P-real is 77% above the long-term trend line. A reversal to the mean trend would entail a 43% decline, possibly over a short period. But it is also possible if the upward earnings trend continues that S&P-real could reach the upper prediction band line by mid-2022. This would amount to a gain of about 13% from the current level.

Go with the latter, until the punch bowl is taken away. Plus all these trillions being spent, a god deal wil find it's way into the markets.
Georg Vrba profile picture
@A Catman Perhaps it will be like 2000 again. Then the S&P was 147% over the long-term trend line - not a "mere" 77%, as it is now. Three years later the S&P was 44% lower.
@Georg Vrba Article Summary: On those merits, we are not in a similar bubble today. As of August 6, 2021, the 10Y Treasury bond rate was 1.23%, which is 1.6 standard deviations below normal. Likewise, the S&P500 value of $4,437 is 2.5 standard deviations above its own respective trendline. Summed together, this gives a composite value of 0.9 standard deviations above normal, indicating that stocks are currently Fairly Valued.

@Georg Vrba - Thank you for the insightful article. Do you have a forecast for future returns of $QQQ?
sgt.red.blue.red profile picture
There are a number of companies that are producing revenue from billions of people worldwide. This was never the case in the past. Think Facebook, Google and the like. I think that anyone who tends to get too conservative and pulls back is making a mistake.
Djreef1966 profile picture
This is going to be brutal.
TaiPan profile picture
So, uninspiring projected returns from indexes.

What to do to boost returns? Perhaps the Top-10 stock portfolio will provide alpha? Or perhaps a combination of trailing stops to get the investor out of SPY when a decline exceeds SPY’s normal trading range, and back into SPY when it recovers 5%-10% off a bottom? I recall testing this approach during the ten years when SPY started and ended at the same price. Pundits concluded that there investors made no money at all during this decade, but the trailing stop method managed to produce profits.
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