Dissecting Returns

The interconnected relationships between certain economic variables and the subsequent climate in the financial markets are presented in Financial Physics.

This study breaks down the components of Total Return and examines the possible returns for the remainder of the decade.

Returns would most likely fall short of the historical average if valuations (P/E ratios) continue to rise at an unsustainable pace.

Economic growth (GDP) and earnings growth (EPS) would be below the historical average if inflation stays below the historical average (near 3.5 percent).

If (1) inflation stays steady and earnings grow slowly, or (2) inflation rises and pushes P/E ratios lower, future stock market returns are likely to be muted.

Strong stock market returns for the rest of the decade are only possible if P/E ratios continue to rise, which goes against the laws of Financial Physics.