US Market in the 2030: It pays to be optimistic
US economy should touch around $32 Trillion by 2030 from the current $22 Trillion. This is a CAGR of around 4% in nominal terms which has been delivered even in the tumultuous period of last 10 years.
The current Market cap of the US markets (represented by the S&P 1500) is around $30 Trillion. This is a market-cap-to-GDP ratio of around 1.4. Considering that the US companies have global revenues of roughly 45%, it makes sense that the GDP (US and non-US together) underlying the US-listed firms can be taken at around $42 Trillion. This would include the $22 Trillion of US GDP and around $20 Trillion of non-US GDP which is catered to by the US companies. This takes the market-cap-to-GDP ratio to around 0.7.
If in 2030, the market-cap-to-GDP goes to 1 which is, typically, considered “fair value” then we can estimate the US market-cap in 2030. The GDP projected is around $32 Trillion. It is likely that by then the non-US revenues are even higher. But we can assume 50%. This means that the total GDP underlying the US stock market would be $64 Trillion. This means that the market-cap would also be around $64 Trillion. That is a CAGR of around 7%-8% in USD terms.
The above numbers are not cast in stone but is just a quick estimate to establish a baseline for expected returns under a normal scenario. It is possible that the US economy struggles due to various socio-politico-economic situations and it doesn’t grow at the nominal 4% in USD terms as assumed above. It is also possible that the US economy grows much faster than that. If that happens, and this has happened in the 90s and early 2000s, it is possible that the nominal GDP growth rate could be 5% to 6% for the US economy.
At 5% growth the US economy would be around $35 Trillion and at 6% it would be around $39 Trillion. Assuming the same 50% non-US revenues, it brings the expected returns to 9% and 10% respectively for the 5% and 6% nominal growth rate scenario. This is the historical expected returns from the S&P 500 over the long-term.
Keep in mind that from 1950s onwards there has been no long period in the US economy when it has grown lower than around 4% nominal GDP. Most of the periods have been between 5%-10% between 1950–1970 and around 10%-15% during the highly inflationary period of 1970 to early 1980s. However, post that even during the lower inflation periods, the US economy continued growing at around 5–6% or more.
Of course, if social, political or economic issues take a turn for the worst, in terms of situations which are difficult to predict today, the returns are likely to be much lower compared to the above estimates. This would primarily be manifested if in 2030 the markets are in some kind of a crisis. The economy is likely to be close to $30 Trillion in most circumstances. However, the markets might not achieve the market-cap-to-underlying GDP (US+non-US) of 1 and that is the main risk to the above scenario. However, such situations correct themselves over the next 2–3 years typically and hence the average level of the 2029 to 2032 is likely to be in the mcap-to-GDP of 1.
Also, it is likely that the international revenue contribution of the listed companies is much higher than 50%. This is because the technology-driven platform companies are primarily listed in the US but actually provide services and generate revenues from across the world.
Global GDP is going to be driven more and more by technology companies, especially, ones with focus on AIoT (Artificial Intelligence and Internet of Things). AIoT includes the enabling underlying infrastructural and foundational technologies, such as, 5G, Cloud, Big Data, Cybersecurity, Blockchain etc. and also the parallel manifestations of Social Media, Smart Homes, Smart Offices, Industry 4.0, Autonomous Vehicles etc.
Together, the US-based and US-listed companies have a huge edge in these spaces and the ecosystem exists for them to play-off each other’s strengths and thrive with a persistent competitive advantage in the global economy. The global GDP is likely to grow much faster than the US nominal GDP growth rate. A lot of the growth would be driven by technology-driven or enabled products, platforms, solutions and services.
The weight of the technology companies in the S&P 500 is also likely to increase significantly by 2030.
We should admit two things here: one investing is not about macro-forecasting but about bottom-up stock picking of SuperNormal Companies @ SuperNormal Prices. Second, no one knows the future. But, it definitely helps to have some idea of what are the reasonable possibilities around which one is working. GDP growth rate projections are typically much more closer to reality than the market levels. And as Graham say, in the short term, the market is a voting machine and in the long-term it is a weighing machine. The market is likely to be “weighted” by the much more accurate GDP levels eventually. Even if 2030 is not the year of a fair value market, it will eventually happen in a few years. Unknowns, Unknowables and Black swans are what makes this field of investing a fun play and the uncertainty is what keeps the market delivering reasonable returns. Otherwise, all the “certain” information would be priced into the markets and leave little for new investors. Let us close with the following quote from Peter Lynch:
“Frequent follies notwithstanding, I continue to be optimistic about America, Americans, and investing in general. When you invest in stocks, you have to have a basic faith in human nature, in capitalism, in the country at large, and in future prosperity in general. So far, nothing’s been strong enough to shake me out of it.”
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