Top Forecasting Model Offers Bad News

Wondering how the stock market will do over the next 10 years? MarketWatch’s Mark Hulbert says one pretty reliable forecasting model has a disappointing answer.

Hulbert says that the model — a variant of the “dividend yield model” — is indicating stocks will return just 5.6% annualized over the next decade, and that’s before inflation. “The model, at least the variant I will focus on for this column, is breathtakingly simple,” he says. “It says that the market’s long-term return will be a function of just two things: the current dividend yield and real growth in earnings and dividends.”

Over the past century, real growth in earnings and dividends has averaged about 1.4%, Hulbert says. When you add in dividend yield and expected inflation, you get the 5.6% nominal return, he says, citing data from Research Affiliates’ Rob Arnott. After inflation, that makes for a projected return of just 3.4% annualized.

Hulbert says that while this forecasting model hasn’t been perfect, its track record is “overwhelmingly” statistically significant. He also looks at the issue of profit margins, and why they may be set to shrink, making that 5.6% figure optimistic.