6 reasons to be bullish

This happens as we anticipate a return to more normal earnings growth in the later years of our analysis. As we write this, our five-year expected returns for U.S. stocks in our base-case subpar growth scenario are still low, at about 4.5%. This scenario now assumes a gradual return to trend-level earnings. But in our optimistic scenario, the returns—at close to 14%—are very strong. This scenario assumes that as we put deleveraging-related headwinds behind us, earnings can temporarily overshoot the long-term trend level (we assume by 20%) in five years. Expected returns in this scenario for European stocks (which had suffered large price declines until a market rebound that started in June) and emerging-markets stocks are materially higher than for U.S. stocks.

The passage of time is important in other ways. Let’s remember that an enormous amount of froth has been taken out of stock prices. The stock market, as measured by the S&P 500, is at a level first reached 13 years ago. And even with the rebound from the extreme lows of 2009, the two bear markets since the start of the 2000s have taken back much of the great bull market of the 1980s and 1990s (that started in the summer of 1982). Looking back over 30-plus years, a period that encompasses that great bull market, the annualized return for the stock market is around 12%. That is a good return but it’s not exceptional and, as such, is evidence that the froth of the incredible 17-year bull market has been wiped away. Besides the fact that stock prices were flat over the past 12 years, multiples are much more reasonable than they were.