Dr. Alan O'Sullivan

So first, the key story there is really looking at historical performance of S&P 500 through the lens of this kind of decomposition of thinking of it as a sum of dividend yield, maybe with Vibax, but let's just say dividend yield, earnings growth and valuation change and sort of the

scary thing is that most of the fluctuations when you look at decadal returns and so on are coming from valuation changes and so on.

And they go, they are especially dangerous now with this rear view mirror perspective, because if you get those rising valuations, which boost realized returns, that happens exactly when expected returns are falling because of those high valuations.

So rear view mirror is getting you exactly to the

wrong direction when you are looking at this.

So now that we have had this strong performance of the market, not because of higher yields or higher or cheaper valuations, if anything, we've gotten good performance because of richening markets.

That is not good news for the future.

The better from historical perspective, a much better predictor is to look at those starting years.

And if anything, we find that both this richening tendency has got mean reversion patterns and even the growth term has got mean reversion in the sense that the best growth forecast typically is pretty much assuming something stable, stable.

let's say 2% or something like that, 2% real earnings growth, I think is a good anchor from today's perspective.

If you are looking at how the growth was in the last decade, if it was abnormally high, actually there is a tendency for it to disappoint in the next decade and vice versa after disappointing decade.

So both abnormal growth and the valuation stories

They influence our expectations into the extrapolative direction, but historical data suggests mean reversion tendencies.

So that's the key story there.

And maybe one other thing I do mention that with that growth number, it is interesting how 100 years ago there was almost no earnings growth and gradually that has gone to 1% and 2% and now more recently even 4%.

type of real growth.

And by the way, I'm talking real and compound numbers.

Arithmetically and nominally, these would be higher numbers.

But so this faster growth is something that has made people now quite excited.

And I think there's a very