Ten years ago, there were three schools of thought about how American stocks would fare during the next decade.

The mainstream belief, widely held by everyday investors, was that US equities would gain an average of 10-12% per year. After all, that was their long-term annualised rate of return, according to the popularly cited data from Ibbotson Associates, which dated to 1926. Why doubt the track record?

Most investment experts thought differently. Those were the recorded numbers, all right, but conditions had changed. By historical standards, the yield on stocks was low, their prices were high, and the nation’s gross domestic product growth was sluggish. Best to shave that annual estimate to 7%-8%. Warren Buffett believed that, as did Jack Bogle, as did Wharton’s Jeremy Siegel.

The third group was the pessimists. Largely guided by statistics such as the Shiller CAPE ratio, they argued that US equity valuations had already crossed that line. Yes, stocks had briefly become cheap after the 2008 global financial crisis, but by 2014 they had fully recovered. Stocks were due for a comeuppance.

Schiller CAPE Ratio

Robert Schiller Data as of June 16 2024

Only twice in the previous half-century had the CAPE ratio been higher than in spring 2014: during the late 1990s and the mid-2000s. As with bars at 2am, nothing good happened after either of those occasions. Perhaps equities would not crash this time around, but they surely wouldn’t thrive. At best, they would eke out a humble nominal annualized gain, say, 2%-3%.

The Results

To the surprise of the experts and the utter dismay of the pessimists, US equities ignored the concerns and proceeded on their merry way. The chart below shows the annualized total return for the S&P 500 from June 2014 through May 2024, along with the outlooks from the forecasting schools.

Total Returns

Morningstar Direct Data as of June 16

Even better than before! That said, the picture is incomplete because it considers only nominal returns. What matters, of course, is after-inflation performance. To what extent did owning a US equity portfolio increase a shareholder’s purchasing power? I redid the exercise using a 2.25% expected inflation rate for the forecasters. (That was not only a common prediction, but also the prevailing breakeven inflation rate on 10-year Treasury Inflation-Protected Securities.)

Real Returns

Source: Morningstar Direct, author’s calaculations, data as of June 16 2024

Incorporating inflation slightly shrinks the victory margin because