The scary part about 🇺🇸 equity return attribution 😲
Came across this nugget🏅🪨 from quant hedge fund AQR Capital Management's Cliff Asness (with commentary from Joseph Bohrer) on LinkedIn last week. Provides proper food for thought. Can history simply be extrapolated here? Me thinks not…🙄
"Nearly half of US equity returns are due to rising multiples and negative cash rates in the last 10 years.
The S&P 500 returned 11.9% p.a. in excess of cash over the 10 years ended June 2023. While earnings growth was robust at 4.5%, 5.3% came from higher valuations and negative real cash rates according to a paper from AQR.
Stating the obvious: the odds of seeing similar tailwinds over the next 10 years is highly unlikely.
Over the last 75 years, real earnings growth has averaged 2.6%. The 4.5% growth seen over the last decade is at the 75th percentile.
Even if earnings growth continues at this high level, it's difficult to see valuations going a lot higher from current levels – while negative real interest rates may never again be seen in our lifetimes.
AI is exciting. S&P 500 returns in the decade ahead, not so much."