Long-term stock returns come from four components: inflation, growth of real earnings per share (EPS), the dividend, and the change in valuation. Using this formula indicates equities are overvalued. We need to create 40% growth in earnings above and beyond price gains, stocks need to decline by 40% over a relatively short time period, some combination of the two, or investors simply need to accept that fact that they will be faced with permanently reduced returns. Can we legislate and create policy, either through government or central banks, that will enable corporate profits to expand faster than the economy and eliminate the overvaluation. History says “no”.
Can Fiscal Policy or Financial Engineering Save US Equities?, Michael Paciotti, CFA, Integrated Capital Management, 2Q 2017 Market Insights