We’ve outlined the fundamentals of long-term return projection models in a recent post:
Butler|Philbrick|Gordillo and Associates have a great post that focuses on the “Shiller” or “Hussman” models for return forecasting
Empiritrage has a detailed report outlining a more sophisticated way of forecasting long-term returns:
Here is some chart porn:
First, a look at the “Hussman” model for long-term returns. This model assumes a peak-to-peak earnings growth, inputs the current P/E and div yield, and then generates low and high return bounds based on future P/Es.
Another approach is to model the dynamics of revenue growth, profit margins, and valuations, and then simulate what the economy might look like under certain assumptions. The benefit of this approach is the incorporation of mean-reverting profit margins and valuation ratios directly into the model.
Here are some baseline results:
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