The longer-term view
So far, we’ve been talking about the bull market that started in October 2022—which I’d also call a “cyclical” bull market. But I also look at what I’d call longer-term “secular trends,” or super cycles.
I believe that since the 2008–2009 financial crisis, US stocks have been in a super cycle of above-average returns. Those above-average returns have been driven by several factors, including falling interest rates over much of that period, rising margins, and buybacks and M&A (merger and acquisition) activity that has reduced the supply of shares. Buybacks, in particular, have been a powerful driver of higher P/Es. On a cumulative basis since 2009, the issuance of shares has totaled about $2.7 trillion, while the reduction in shares has totaled about $21.3 trillion. That’s a huge supply-demand imbalance against a US market cap of about $44 trillion.
Of course, returns can only be above average for so long before mean reversion kicks in. Estimating when this might happen is complex. But based on my modeling, I believe we are also in the seventh inning of this secular bull market.
The current super cycle has tracked previous bull-market super cycles of 1949 to 1968 and 1982 to 2000 quite closely. In terms of the total price gain or total length of the super cycles, we seem to still have room to run. But I think it’s important to also look at valuations. My favorite valuation metric is the 5-year price-to-total-cash ratio (with total cash including dividends and share buybacks). Comparing the current period to past super-cycle regimes, on a price-to-total-cash basis the current secular bull does not appear to be over its skis yet.
Having said that, it’s fair to note that valuations are historically high. While valuations are useless in predicting short-term returns, they have historically been effective in predicting long-term returns. This is evident through a clear inverse correlation historically between the trailing 5-year price-to-total-cash ratio and the market’s subsequent 10-year compound annual growth rate.
To turn that historical relationship into a projection (and to try to get a sense of when this secular bull market might peter out), I created a regression model, using the 5-year price-to-total-cash ratio as an input and generating estimated subsequent 10-year compound annual growth rates as an output.
