McKinsey – Whither the US equity markets?

The underlying drivers of performance suggest that over the long term, a dramatic decline in equity returns is unlikely. April 2013 | byBing Cao, Bin Jiang, and Tim Koller

“US equity markets stretched once again into record territory in March, setting new highs on both the Dow and the S&P 500 indexes. Thats good news for investorsit wasnt that long ago when the market was headed in the other direction. The question on everyones mind, though, is where the market is headed next. In the short term, of course, theres no telling what will happenand speculation is risky. Investors and companies alike are notoriously weak at timing their investments to the market. But those are short-term questions; what really matters from a corporate-strategy perspective is the long term, and what really counts in the long term is the markets relationship to the real economy. In fact, much of the equity markets performance in the United States, as weve seen over at least the past 50 years, is clearly linked to the performance of the real economy, including GDP growth, corporate profits, interest rates, and inflationin spite of short-term volatility. And in the absence of some disruption of that link, the market should continue to thrive. In a nutshell, if GDP were to grow at rates comparable to the 2 to 3 percent annual real growth of the past 50 years and inflation is kept in check, investors should be able to expect annual stock-market returns of 5 to 7 percent in real dollars over the next 10 to 20 years.”

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