Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 599

Mapping future US market returns

Over the last 15 years, the US stockmarket has come to dominate global passive portfolios, with its weight in the MSCI World Index rising from below 50% to nearly 75%. That ascent was driven by exceptional returns. Since 2010, the S&P 500 has returned 13.8% per annum—much higher than markets elsewhere, exceptionally high versus its own history and inflation, and a near-record result against bonds and cash.


Source: MSCI.com, as of 31 December 2024.

Charts showing the S&P’s staggering performance are easy to find, often with the implicit message that what goes up must come down. That’s both unsatisfying and not how markets work.

The key drivers for US outperformance

It’s more useful to understand what drove those returns, and what investors need to believe to expect similar returns again. As we’ve written before, equity returns come from just three sources: fundamental growth, change in valuation, and dividends. We can get a slightly clearer picture here by splitting fundamental growth into sales growth and change in margins. So where did the S&P’s 13.8% p.a. come from?

The first driver was sales growth. American companies grew their sales by 5.2% p.a.—a little low versus history, but then so was inflation. To see what happened to earnings, we need to look at margins. In 2010 net profit margins were 9%. Over the following years, margins expanded dramatically, to about 13%. Margins going up boosted returns to the tune of 2.5% p.a.

Putting sales and margins together gives us earnings. To get price, the next piece is the price-earnings ratio. In 2010 the S&P traded at 15 times trailing earnings. Valuations have since got much more expensive, and the US market now trades at 25 times earnings. Rising valuations kicked in 3.6% p.a. to the S&P’s stellar return. The last piece is dividends, which contributed 1.9% p.a.

Scenarios for future returns

Now, let’s say we want to re-run history. What do we have to believe to expect 13.8% p.a. again?

Sales growth and dividends are reasonably stable, so let’s say they contribute at the same rate as the past cycle. That leaves changes in margins and changes in valuations.

For margin expansion to boost returns by 2.5% p.a. again, margins need to go up again, from today’s much higher starting point. Margins are cyclical, and they are currently near record highs. Doing the numbers, a boost of 2.5% p.a. would require net profit margins at 18% by 2040—higher than the US has ever seen.

Similarly, for rising valuations to boost returns by 3.6% p.a. again, valuations need to go up again, from today’s much more expensive levels. At 25 times trailing earnings, the S&P’s current valuation has only been eclipsed at the top of the tech and Covid bubbles. To expect another 3.6% p.a. boost to returns, valuations need to end up at 40 times earnings. Again, this would be a record by some distance.

Putting it together, roughly half of the S&P’s tremendous recent returns came from rising margins and valuations. If we want a re-run, we have to expect net margins to reach 18% and valuations to hit 40 times earnings. Crazier things have happened, but it’s tough to make the numbers work.

What if margins and valuations don’t help, but don’t hurt either? If both stay at their current near-record levels, that would leave sales growth and dividends to drive returns. Sales and dividends chugging along would suggest returns of 7.2% p.a. That’s normal over the very long term, but it’s roughly half what we saw over the latest period. And that’s if valuations and margins stay very, very high.

What if they fall to 20-year-average levels? That captures the period since Google’s listing where highly profitable, highly valued tech businesses have been ascendant. If margins and valuations fall, the numbers suggest a 3.4% p.a. long-term return for the S&P—less than the yield on US Treasury bonds. Said another way, the broad US stockmarket is dependent on great expectations. Great expectations are already in the price, so to expect a great return, investors need to believe that reality will prove even more amazing than markets already expect.

A few things could help there. Sales growth has often been higher historically. Companies are the ones raising prices, so they can usually more or less capture inflation through sales growth. Higher sales growth from inflation would boost the S&P’s absolute return, but not its real return.

Margins could continue to climb. A corporate tax cut helped before and could again. But strategies to reduce corporate taxes also reduce the benefit of any corporate tax cuts. Huge and hugely profitable companies could continue to thrive, pulling up the average margin for the market. But society does not suffer ever-rising profit margins forever. Monopoly-like margins attract competition and regulation, politicians dislike rival power centres, and workers dislike prices and profits growing faster than wages.

Expectations in the US are high, and when expectations are high, so is risk. Fortunately, low expectations are easier to find pretty much everywhere else. Stocks outside the US are cheaper, whether you weight them equally, by size, or look just at the ‘value’ or mid-sized companies. The US is not fruitless—some of our highest-conviction holdings are American companies. But generally we’ve found other markets to be more fruitful hunting grounds for undervalued ideas. We are far happier seeking low expectations.

 

Eric Marais is an Investment Specialist at Orbis Investments, a sponsor of Firstlinks. This article contains general information at a point in time and not personal financial or investment advice. It should not be used as a guide to invest or trade and does not take into account the specific investment objectives or financial situation of any particular person. The Orbis Funds may take a different view depending on facts and circumstances.

For more articles and papers from Orbis, please click here.

 

  •   19 February 2025
  • 1
  •      
  •   

RELATED ARTICLES

How passive investing is driving the decline of active fund alpha

History says US market outperformance versus Australia will turn

An obsessive focus on costs may be costing investors

banner

Most viewed in recent weeks

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Why have Australian living standards 'fallen' and how do we fix it?

For the last few years there has been much talk of a 'cost-of-living' crisis in Australia and of 'falling living standards'. Lately this has flared up again with the pickup in inflation resulting in a renewed fall in real wages.

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

The missing link in the CGT debate

A little-noticed consequence of Labor’s tax changes could have implications well beyond investors’ tax bills. The issue raises bigger questions about incentives, capital allocation and the drivers of long-term economic growth.

Latest Updates

Planning

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Superannuation

How much super should you have?

Average super balances are one of the most misleading benchmarks. They ignore your goals, spending and future needs, creating a false sense of security. Here is how I calculate exactly where I need to be at every decade.

Retirement

Retiring from work is easy, retiring into life is harder

Most people spend decades planning how to retire. Far fewer plan for what comes next. The biggest retirement challenge isn't always financial, and it often catches even the most prepared retirees completely off guard.

Shares

Right asset class, wrong index: the trap in Australian small caps

Most Australian portfolios are concentrated in large caps, with relatively little exposure to smaller companies. But what if the biggest risk isn't the economy, interest rates or valuations? For many, the risk is hidden in plain sight.

Property

Are these assets the missing piece in Australian portfolios?

Many investors remain concentrated in shares, cash and property. Despite their popularity among institutional investors, real assets remain underrepresented in many SMSF portfolios. Could they be the missing piece?

Investment strategies

The biggest risk that buy-and-hold investors ignore

Investors spend decades learning how to stay invested, yet few have a plan for getting out. When a financial goal has a hard deadline, a worked example shows why a fixed derisking schedule should outrank buy-and-hold discipline.

Investment strategies

How passive investing is driving the decline of active fund alpha

Why have active managers struggled as passive investing has surged? Research suggests that flows into index funds and ETFs are creating structural headwinds, penalising the stock-picking strategies that once generated alpha.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.