Future stock market returns may be lower: here's why
- Robin Powell
- 17 minutes ago
- 7 min read
Multiple lines of evidence suggest future stock market returns will fall short of historical averages. Investors should prepare for more modest gains and adjust their strategies accordingly.
Most investors have a deeply ingrained belief that stocks always deliver generous returns over the long term. It's a comforting assumption, reinforced by decades of financial education and retirement planning advice. But what if this belief is based on an historical anomaly rather than an immutable law of investing?
Consider this: if you'd invested £1,000 in US stocks in 1900, you'd have roughly £1.3 million today after adjusting for inflation. That represents an extraordinary 8.5% annual real return over 125 years. Small wonder that "stocks for the long run" became investment gospel.
Yet today, something unprecedented is happening. Major institutions that manage trillions in assets, legendary investors with multi-decade track records, and rigorous academic research are all pointing to the same uncomfortable conclusion: those generous historical returns may not repeat.
Key findings
Institutional consensus: Major forecasters project US equity returns of just 3-6% annually over the next decade, roughly half historical averages
Valuation extremes: Multiple metrics including CAPE ratios and market cap-to-GDP are at or near historical peaks
Demographic headwinds: Ageing populations across developed markets create structural pressures on returns
Global opportunity: International markets trade at significantly lower valuations than the US
Evidence-based advantage: In a low-return environment, cost control and discipline become more valuable than ever
A simple but powerful insight
Before examining complex forecasts, consider research published in December 2025 that cuts through the noise with elegant simplicity. Victor Haghani and James White examined 125 years of US stock market history and made a startling discovery.
Those exceptional 8.5% real annual returns weren't driven by exceptional earnings growth. Instead, they were almost perfectly explained by one factor: the high earnings yield (the inverse of the price-to-earnings ratio) available to investors in 1900.
"US stock returns from 1900-2025 have been truly exceptional, but are almost entirely explained by their high starting earnings yield in 1900," the researchers conclude in their December 2025 analysis (Elm Wealth research). "By contrast, today's US stock market earnings yield of 3.5% predicts low long-term real returns."
Think about the implications. Despite 125 years of unprecedented technological progress, global expansion, and economic growth, real corporate earnings grew at just 2.0% annually. Even accounting for the 43% of earnings that companies retained for reinvestment, American businesses failed to "catch the full wave" of the country's 3.2% annual GDP growth.
If the greatest period of innovation and growth in human history couldn't deliver exceptional earnings growth, what does that say about expectations based on today's much lower earnings yields? This framework offers a sobering prediction: earnings yield approximates long-term real returns. At current levels around 3.5%, compared to 8% in 1900, the arithmetic points to dramatically lower future returns.
When the professionals agree
This simple earnings yield framework aligns with forecasts from major investment institutions that rarely agree on anything. When they converge on similar conclusions, it's worth investigating why.
Institution | Forecast Period | Asset Class | Return Forecast | Type |
Vanguard (Vanguard forecasts) | 10 years | US equities | 3.3-5.3% | Nominal |
Vanguard (Vanguard forecasts) | 10 years | International equities | 5.1-7.1% | Nominal |
GMO (GMO forecasts) | 7 years | US large-cap | Negative | Real |
J.P. Morgan (JPM assumptions) | Long-term | Global 60/40 | 6.4% | Nominal |
Phillips & Kóbor (2025) | 10 years | S&P 500 | 4.2% | Nominal |
The gap between professional analysis and individual expectations is striking. Vanguard's Investor Pulse survey (Vanguard investor survey) found that individual investors expect approximately 7.6% annual returns, nearly double what the firm's models project.
Meanwhile, bonds have become genuine competition for stocks. With corporate bonds yielding 4-5% as of late 2025, the traditional equity risk premium has largely evaporated.
Buffett's perspective on future stock market returns
Warren Buffett, whose investing career spans over six decades, offers perhaps the most compelling validation of these concerns. The Buffett Indicator (total US market capitalisation divided by GDP) reached 207% as of August 2025, well above the historical "fair value" range of 90-135%.
Buffett's actions speak louder than forecasts. Berkshire Hathaway has been a net seller of stocks for 11 consecutive quarters, building a cash pile that reflects the difficulty of finding attractively priced investments. His expected real returns over the next eight years? Roughly 0.1%.
Jeremy Grantham takes an even more dire view. He argues that current valuations rival the historic peaks of 1929, 2000, and 2021. In his analysis, US stocks could fall 50% without breaching historical norms. John Hussman describes the current environment as the "third great speculative bubble" in US history, with valuations that surpass those of 1929 and 2000.
The consensus among these experienced investors is striking: extreme valuations, low forward returns, and high probability of significant corrections.
Current valuations in perspective
Multiple valuation metrics confirm these concerns. As of August 2025, warning signals are widespread:
Metric | Current Value | Historical Average | Signal |
S&P 500 CAPE | 38.8 | 30.9-31.0 | Very high |
Market cap-to-GDP | ~207% | 90-135% | Extreme |
Shiller Excess CAPE Yield | 1.46 | 2.74 | Low |
Academic research validates these indicators' predictive power. Kuvshinov and Zimmermann (2018) (NBER working paper) studied 17 advanced economies and found that market capitalisation-to-GDP ratios reliably forecast market performance over multiple horizons, achieving very high R-squared values approaching statistical significance limits.
Keimling (2016) (SSRN research paper) confirmed that CAPE ratios predict 10-15 year returns across different countries and time periods. Research shows that up to 40% of future return variability can be predicted based on initial valuation multiples.
A global perspective
Current valuations reveal stark geographic disparities. While US markets trade at extreme levels, much of the world offers different opportunities:
Region/Country | CAPE Ratio | Relative Valuation |
US (S&P 500) | 37-39 | Extremely expensive |
Europe (broad) | 20.6 | Moderate |
Japan (Nikkei) | 25.0 | Moderate-high |
UK | 18.6 | Reasonable |
Brazil | 11.5 | Cheap |
South Korea | 12.2-15.8 | Cheap |
Hong Kong | 10.3 | Very cheap |
India | 35.8 | Very expensive |
This disparity suggests that high valuations aren't universal. The US dollar has also weakened roughly 8-10% against major currencies in 2025, creating additional tailwinds for international investments.
The demographic challenge
Beneath valuation concerns lies a deeper structural issue: rapidly ageing populations across developed markets. Across OECD countries, the old-age dependency ratio has risen from 19% in 1980 to 31% in 2023, with projections showing 52% by 2060.
Research demonstrates (NBER demographic study) that demographic trends account for roughly one-third of declining real interest rates in advanced economies. Ageing populations drive down rates as longer life expectancy encourages higher savings, while productivity growth slows as workforces age.
For equity investors, demographics alter fundamental supply and demand for financial assets. Younger workers accumulate equities while older investors shift toward bonds. As the proportion of accumulators shrinks relative to decumulators, this creates persistent pressure on equity valuations.
Addressing common objections
These arguments run counter to deeply held investment beliefs. The most common objection centres on "stocks always win in the long run."
McQuarrie (2024) (Financial Analysts Journal) challenges this assumption. Examining US market history from 1792 to 2022, he found that stocks don't always outperform bonds over long periods. Before 1861, bonds often beat stocks over 30-50 year periods. Even post-1942, edge probabilities seldom exceeded 68% for 50-year horizons.
The "innovation will save us" argument faces scrutiny when viewed through the Haghani-White framework. If 125 years of extraordinary technological progress failed to generate exceptional earnings growth, why should future innovations be different?
Finally, wealth creation in equity markets is extraordinarily concentrated. Research shows (Journal of Financial Economics) that just 4% of stocks account for all net wealth creation since 1926. This extreme skewness means broad market gains depend on identifying rare winners, a task that becomes harder as markets mature.
Practical implications for investors
Retirement planning
Traditional rules of thumb such as the 4% withdrawal rate assume long-term equity returns of 8-10% a year. If real returns fall to 2-4%, these withdrawal rates become unsustainable. Many planners now recommend rates of 3% or lower. That means either building substantially more wealth before retirement or accepting a lower standard of living later in life.
Savings behaviour
Lower returns mean personal savings must shoulder more of the load. Workers in their 30s and 40s may need to save 15-20% of their income rather than the traditional 10% to reach comparable retirement goals.
Asset allocation
The traditional 60/40 portfolio emerged when bonds yielded 2-3% and equities 8-10%. Today, with both expected to return similar amounts, increasing bond allocations could improve risk-adjusted returns and reduce volatility.
Global diversification
Valuation gaps between regions are unusually wide. European markets trade at roughly half US CAPE levels, while many emerging markets are cheaper still. Attractive entry points combined with a weaker US dollar could make international diversification both a risk reducer and a potential return enhancer.
Value tilt
If overall market returns decline, the premium for genuinely undervalued securities may grow. This does not mean abandoning diversification for stock picking, but it could justify tilting toward value-oriented strategies and markets with more attractive valuations.
Evidence-based investing
In a low-return world, every basis point matters. Minimising fees, avoiding costly market timing, and staying diversified are more important than ever. Low-cost index funds and ETFs, tax efficiency, and disciplined rebalancing become essential tools for preserving returns.
Conclusion
The convergence of institutional forecasts, legendary investor warnings, academic research, and mathematical frameworks all point toward a similar conclusion: future stock market returns will likely fall short of historical averages.
This isn't cause for despair but for realistic planning. Those who adjust their expectations, increase their savings rates, diversify globally, and maintain disciplined investment approaches will be better positioned than those who continue planning based on historical returns that may not repeat.
In an era of scarce returns, the principles of evidence-based investing become more valuable than ever. Success will belong to those who focus on what they can control: costs, behaviour, and systematic capture of whatever returns markets provide.
The strong likelihood that future stock market returns will be lower than historic averages makes it all the more important to use an evidence-based financial planner. These professionals understand the importance of low costs, global diversification, and disciplined strategies in a challenging return environment. To find a qualified adviser who follows evidence-based principles, why not use our Find an Adviser service?
