S&P 500 has modest expectations for revenue and margin growth

S&P 500 has modest expectations for revenue and margin growth

Whitney Tilson’s email to investors S&P 500 return over the past and next decade; Tech and FAANG stocks. Looking at revenue and margin growth there may not be such great returns ahead.

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1) Analysts at Credit Suisse collected some interesting data about the past decade in a report entitled “Those Crazy Teen Years.” Over the decade, the S&P 500 Index compounded at 13.6%, after being negative over the prior decade. The chart below shows the five factors that drove the return: Revenue, margin, buybacks, the price-to-earnings (P/E) ratio, and dividends.

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And this chart shows how much the tech sector – and the five FAANG stocks in particular – outperformed the broad market:

This was driven by both exceptional revenue and margin growth, as these two charts show:

The first chart is a helpful framework for thinking about what the S&P 500 might return in the coming decade, and the last two charts indicate that we should have modest expectations for revenue and margin growth going forward – since it's highly unlikely that tech stocks will be such a driver of outperformance for another decade.

If I were to hazard some guesses, I'd say that revenue growth results in 3.0% compounding for the S&P 500 over the next decade (down somewhat from 3.9% last decade), margins and P/E multiples remain flat (at best), and buybacks and dividends remain constant at 1.4% and 2.1% contributors, respectively. This would result in the S&P 500 compounding at 6.5% annually.

That's decent – it would almost certainly beat the return on bonds by a wide margin – but it would be less than half of the growth rate of the past decade, so investors should adjust their expectations accordingly...


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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)www.valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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