Siegel: US Stocks Not In A Bubble

AMSTERDAM – U.S. stocks may have produced good returns for investors, but are neither overvalued nor in a bubble, said industry guru Jeremy Siegel today, predicting solid returns for the asset class for years to come.

Speaking today at Inside ETFs Europe, ETF.com’s annual conference in Amsterdam, Siegel said that investors have received an average of 6.7 percent returns every year on U.S. stocks since World War II, and, after inflation, returns have doubled every decade over the last two centuries.

The median price to earnings (P/E) ratio of the S&P 500 Index is 16.1 over the last 60 years, and currently stands slightly higher at 18.

“We’re not in a bubble today. We’re above the mean,” explained Siegel, who is WisdomTree's senior investment strategy advisor as well as the Russell E. Palmer Professor of Finance at The Wharton School of the University of Pennsylvania. 

March 2000 A Real Bubble

“The P/E of the Nasdaq reached 600 in March 2000,” continued Siegel. “That’s a bubble, I admit it, but anyone who today calls the stock market a bubble doesn’t have really good grasp on history and valuation.”

The industry veteran forecasted 5.5 to 6 percent real returns on equities if the current P/E ratio remains constant. If inflation reaches the Federal Reserve’s 2 percent target, returns would hit between 7 and 8 percent.

Investors might question the forecasted return on equities since U.S. GDP growth contracted by 0.7 percent in the first quarter of this year.

Slow-Growth Drivers

“There are really two factors that are driving slowdown in growth—the collapse of oil prices and the rise of the U.S. dollar. Those two must stabilize—not go back up—to resume growth,” said Siegel.

Investors are also seeing wider-than-average equity premiums right now—at 5 percent. Historically it was 3 to 3.5 percent, he notes.

Siegel alluded to his friends and peers like Robert Shiller and Rob Arnott who swear by the cyclically adjusted P/E ratio, which use the last 10 years of earnings of a company to measure its value. The so-called CAPE currently suggests the market is overvalued, but Siegel says there have only been nine months since 1991 when the CAPE ratio estimated that the market was a good time to buy.

Profit Margins Healthy

Furthermore, profit margins have increased in the U.S. to an all-time high, mostly due to three reasons: the rising share of corporate profits; the increased weight of the technology sector; and the low level of leverage of firms. These reasons “have nothing to do with being overvalued,” said Siegel.

“We’ve had wars, we’ve had the Depression, we’ve had double-digit inflation, we’ve bumped up and down but we’ve always come back to trend. I see nothing today that diminishes the attractiveness of equities as a long-term investor,” he said.

As for 10-year U.S. Treasury yields, Siegel said that when monetary conditions have normalized, yields could rise to at most 2 percent from current yields [2.38 percent today] but most likely 1.5 percent. This is a significant collapse over time as yields have come down from over 4 percent in the year 2000 due to falling GDP growth and risk aversion as people pile into perceived safe havens.