Are we set for a decade of negative S&P 500 returns?

Are we set for a decade of negative SP 500 returns?

This chart certainly thinks so, and on a day as grey as London is right now, it hints that US equities may be in for a similarly overcast decade.

It plots the value of the US market cap relative to debt vs. the SP 500s forward 12-year annualised return. Over more than seventy years, the pattern between them has been surprisingly stable. When equity values rise far above the debt base that supports the real economy, long-run returns tend to be much weaker. When the ratio is low, subsequent returns are usually stronger.

The relationship holds as a high ratio means investors are paying very rich prices for each dollar of underlying economic balance-sheet support. To earn strong returns from these starting points, future earnings would have to grow far faster than usual, or valuations would need to rise even further. History shows that neither persists for long. Growth slows back toward the broader economy, valuations cool, and the long-run return profile ends up being modest.

Todays valuation sit near the extremes last seen in the late 1990s and early 2020s. I am not saying that a crash is imminent but it does suggest we need to be realistic about what US equities can deliver over the next decade. High starting valuations have rarely been the launchpad for strong twelve-year returns, and this chart is a reminder of how much that starting point shapes the long-term investment journey.

So is this chart too gloomy? Or is the outlook for US equities set to brighten sooner than the London winter weather?