Morningstar Analyst Curt Morrison, in a recent column, called the Standard & Poor’s 500 index a poor investment loaded with overpriced stocks largely poised for modest growth.

Projections for the fundamental conditions to achieve robust long-term stock performance – inflation, dividends and real capital appreciation – suggest the S&P 500 will continue to trail its historical 10.2% historical average return, he said.

In Morrison’s explanation, bond analysts examining the spread between long-term government bonds and long-term treasury inflation-protected securities (TIPS) peg 30-year inflation rates at 2.8%, which is close to the historic 3.2% level.

But the S&P 500’s current 1.71% dividend yield as of last week is far lower than the 4.8% dividend yield in 1926.

In addition, future capital appreciation, comprised of real earnings growth and expansion of the price per share earnings multiple, is suspect because "market valuations already incorporate expectations for future growth" so rising p/e multiples will not support future returns. As a result, future capital appreciation must be derived solely from real earnings growth, Morrison said.

The combination of factors suggests the market must generate 5.4% minimum average real earnings growth in order to match historical 10.2% historical returns. While the goal is theoretically sustainable, Morrison notes, historical evidence suggests the scenario is highly unlikely.

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