Sobering 10-Year Market Predictions from CFOs
The Graham-Harvey survey is complete and the expectations of CFOs are available for review.
As the figure below highlights, expected returns on the S&P 500 have been gradually decreasing over time.
As of Q1 2015, the 10-year bond yield was projected at 2.12%.
The projected 10-year annualized return was 6.63% (2.12% 10-year + 4.51 equity premium).
How in the world are the endowments and pensions going to hit their 8%+ bogies?
Learn more about equity return forecasting here.
Paper abstract below:
We analyze the history of the equity risk premium from surveys of U.S. Chief Financial Officers (CFOs) conducted every quarter from June 2000 to March 2015. The risk premium is the expected 10-year S&P 500 return relative to a 10-year U.S. Treasury bond yield. We show that the equity risk premium has increased more than 50 basis points from the levels observed in 2014. The current 10-year risk premium is 4.51%. Similarly, measures of risk such as investor disagreement and perceptions of volatility have increased. Interestingly, the increased premium and risk are not reflected in market-based measures of risk, such as the VIX and credit spreads. We also link our survey results to measures survey-based measures of the weighted average cost of capital and investment hurdle rates. The hurdle rates are significantly higher than the cost of capital implied by the market risk premium.
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Definitions of common statistics used in our analysis are available here (towards the bottom)