Abstract
Analysis of the very long term in U.S. markets indicates that average real stock market returns have been about 7 percent and average real T-bond and T-bill returns have been about half that figure. Downward bias in the more recent bond returns and upward bias in recent valuations may be skewing the analysis. Valuations have been rising for three possible reasons: declining transaction costs, declining economic risks, and investors learning that stocks have been undervalued on average throughout history. An analysis of the historical relationships among real stock returns, P/Es, earnings growth, and dividend yields and an awareness of the biases justify a future P/E of 20 to 25, an economic growth rate of 3 percent, expected real returns for equities of 4.5–5.5 percent, and an equity risk premium of 2 percent (200 bps).
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