Analysts Warn S&P 500 Faces Decade of Negative Returns

Bank of America warned in a September 14 client note that current stock valuations signal a decade of negative returns for the S&P 500. The bank reported that its normalized price-to-earnings ratio of 32 implies an average annual return of -3% through 2036, with six of ten valuation gauges suggesting negative returns. To mitigate this, the bank recommends the S&P 500 equal-weighted index, which it views as a superior alternative with an implied annualized return of +3%.

Equity strategist Leo Nelissen echoed these concerns, warning that the index may enter a lost decade of low or negative real returns. Nelissen argues that a forward P/E of approximately 22x and a 4.5% yield—which falls below the 10-year Treasury yield—erode the equity risk premium. He attributes recent gains to accommodative policy and top-heavy AI growth, neither of which he believes are guaranteed to persist.

To navigate these risks, Nelissen advocates for a TOLL framework for stock picking. This strategy prioritizes companies with pricing power, scalable operations, oligopoly benefits, and tangible assets to withstand inflation and AI disruption. While Bank of America acknowledged that historical valuations might be too punitive given the high quality of current companies, it maintains a preference for lower-valuation indices.