The Easy Guide to Where Stocks Are Headed Next

An entire industry is devoted to guessing where the S&P 500 is headed next. And an entire industry almost always gets it wrong.

As I wrote last week, future market returns are not hard to calculate. They'll equal the dividend yield plus earnings growth, plus or minus the change in valuation multiples.

The problem, of course, is that earnings growth is hard to predict, and the change in valuations is totally impossible to know. But while we can't know exactly how the future will play out, we can make reasonable estimates within ranges.

Take the matrix below. It shows where the S&P 500 will be 10 years from now given various assumptions. For reference, the index currently trades at about 1,650.

Source: Robert Shiller; author's calculations.

Now, this doesn't include dividends, but it also doesn't adjust for inflation. It's reasonable to assume that those two factors cancel each other out, so what we're looking at here is likely close to total real returns.

Since 1950, S&P 500 earnings growth has averaged 5.9% per year, and the P/E ratio has averaged 16.7. Of course, the "average" doesn't tell us much when looking at a span of history that bounces around between crushing lows and epic highs. "History doesn't crawl; it leaps," the saying goes.

But the next time you hear a market forecast, remember this table. The most honest forecast anyone can give for where stocks will be in 10 years is somewhere in there.

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The article The Easy Guide to Where Stocks Are Headed Next originally appeared on Fool.com.

Fool contributor Morgan Housel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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