As investors focus this week on all the talk of possible interest rate cuts and the upcoming presidential election, JPMorgan forecasts serious risks to long-term stock returns. The company said the market appears too expensive compared with history and expects the S&P 500 to return 5.7% annually over the next decade. That’s slightly more than half the post-World War II average, analyst Jan Loeys said in a recent note to clients. The broad-market index’s current trailing operating multiple of 23.7 puts the S&P 500’s price roughly 25% above its average multiple of 19 over the past 35 years, according to Loeys’ analysis. Over the past three decades, he said, corporate profits have grown much faster than the overall economy, contributing to high stock returns and U.S. outperformance. .SPX 5Y represents the performance of the S&P 500 Index over the past five years. “For the past several years, we have been warning of the risks of the end of the Great Moderation due to more aggressive fiscal policy and reduced focus on inflation control. This would increase risk premiums and thereby depress equity multiples,” Lowes writes in the book road. “Great Stability” refers to the period of low inflation and stable economic growth from the mid-1980s to 2007. Lowes added: “The Great Moderation faces serious risks of reversal, as the macroeconomic stability it brought does not achieve long-term investment and growth objectives but is instead accompanied by weaker growth and capital spending and rising inequality.” In addition to expensive valuations, some risks that could restrain stocks moving forward include the growing aging population of baby boomers, which will reduce their stock allocations, as well as de-dollarization and de-globalization, the analyst said. The company added that multiple downgrades in the United States over the past few years due to deteriorating democratic qualities could also affect earnings growth, which could harm its economy and stock market. Rising borrowing costs due to an “out of control federal deficit” could also eat into corporate profits, the company said.
