If you’re relying on index funds or stock and bond mutual funds to fund your retirement, you have a big problem.
The stock market is driven by earnings growth, the valuation level, and interest rates.
If rates are dropping, earnings are improving, and the price-to-earnings (PE) ratio is going higher, that is all fantastic for the stock market.
You need to have at least two of the three variables improving, or it’s tough for stock to power higher for very long.
On the opposite side of that, if rates are rising, have fallen to the floor, or are weak, then the multiple is going to contract and prices will fall.
Right now, the PE ratio of the S&P 500 is 21. The yield on the 20-year Treasury bond is a whopping 2.02%, and the 10-year yield is just 1.53%.
Earnings for the second quarter declined year-over-year, and analysts are lowering their expectations for the rest of the year.
None of the three components of stock market valuation is favorable right now.
When you add up the numbers, it tells me that for the next decade, investors will be lucky to get 5% returns from the major stock indexes.