Though stocks have recently enjoyed a strong run, Deutsche Bank strategists have highlighted that stock-market returns over the past 25 years haven’t been as impressive as they might seem. Their recent report notes that, since 2000, global markets have navigated rising debt levels, slower demographic growth, and a slowdown in globalization. For context, in 2000, the U.S. Congressional Budget Office projected that federal debt could be paid off by 2013; instead, the debt-to-GDP ratio has surpassed 100%, a level not seen since just after World War II. From the perspective of stock performance, the S&P 500’s returns since December 31, 1999, tell a story shaped by setbacks, including the dot-com crash, the 2008 financial crisis, and the inflation surge in 2022. These factors have left this 25-year stretch with the second-lowest annualized returns out of nine periods dating back to 1800—only the early 20th century fared worse. This serves as a reality check for those expecting uninterrupted stock market growth, especially as some analysts, including those at Goldman Sachs and Vanguard, warn of single-digit returns in the years ahead. Adding to this perspective, Deutsche Bank’s analysis shows that stocks haven’t just delivered lower returns in absolute terms; they’ve also lagged behind other assets like gold. Since 1999, gold has achieved annualized returns of 6.8%, surpassing the S&P 500’s 4.9%. Even in 2024, gold slightly outperformed stocks, with a year-to-date gain of 25.6%. Despite these challenges, Deutsche Bank maintains that equities remain a solid choice for long-term investors. Historically, stock underperformance doesn’t tend to last more than a decade, and with global debt rising, there’s an increased likelihood of future inflation. In such periods, stocks have historically outperformed bonds, which suffered significantly in 2022.

This year’s strong gains in the Dow Jones suggested an advantage for the Democrats and Kamala Harris in the presidential election, but it underscored an important reality: Wall Street and Main Street are drifting further apart. Historically, the stock market has been viewed as a bellwether for election outcomes, but this election proved otherwise, raising the question of why it failed to predict the results. Over recent months, I tracked a model that connected the incumbent party’s chances of staying in office to the Dow Jones Industrial Average’s performance. Leading up to the election, this model gave Vice President Kamala Harris, the Democratic candidate, a 70% likelihood of defeating former President Donald Trump. When models like this one falter, it’s an opportunity to reassess their assumptions. Is this merely an example of a model’s natural limitations? Or does it reflect fundamental shifts in the economy and markets, diminishing the model’s relevance? In retrospect, the breakdown seems to stem from a widening gap between Wall Street’s performance and the realities of the broader economy—often referred to as the Wall Street-Main Street divide. In the past, the Dow was a fairly reliable indicator of the economy’s health and, by extension, voters’ economic sentiment. But that connection has weakened considerably over the years. To highlight this shift, I examined the long-term relationship between quarterly U.S. GDP growth and S&P 500 earnings per share (EPS) going back to 1947, using a 20-year trailing correlation. This correlation, which reached about 40% in the early 1990s, is now just 15%, showing a steady decline, with the only notable exception being the brief alignment during the 2008-09 financial crisis. This declining correlation sheds light on why this year’s stock market surge didn’t translate into stronger support for Harris. While Wall Street rallied, many Americans are still grappling with financial hardships. The implications are clear: traditional economic indicators may be losing their forecasting power, and analysts may need to focus more on company-specific factors rather than broad economic cycles. Vincent Deluard, StoneX’s director of global macro strategy, recently echoed this sentiment, observing that “investors spend far too much time worrying about the next recession. Economic growth is just one small driver of stock prices. Margins and multiples matter a lot more.” In other words, understanding stock performance today may require focusing on the profitability and valuation multiples of companies rather than macroeconomic indicators. This shift doesn’t simplify forecasting; profit margins and price-to-earnings ratios are challenging to project. However, by recognizing the diminishing role of economic growth in market performance, analysts can refocus on these crucial factors driving stock prices in the current economy.

Stifel’s Barry Bannister Warns: “The Train is Approaching Crazy Town” Wall Street bear Barry Bannister cautioned Thursday that the S&P 500 is entering “mania” territory, as surging valuations push stocks to expensive and potentially unstable levels. This rally, he says, may lead to a further near-term surge before a significant pullback looms on the horizon. In a report titled, “This is your conductor … the train is approaching Crazy Town,” Stifel’s chief equity strategist Bannister warns that even under a favorable scenario, where the U.S. achieves a “soft landing,” various factors—such as increased U.S. fiscal spending, China’s economic stimulus, and global geopolitical tensions—are amplifying the risks. These factors are pushing the S&P 500 toward valuation highs unseen in nearly 80 years. With the S&P 500 recently closing above 5,970, Bannister suggests a fair valuation would be closer to 5,250. He argues that the index is overvalued by about five multiples based on the financial conditions index and the cyclically adjusted price-to-earnings (CAPE) ratio. Reflecting on historical “manias,” Bannister believes the S&P 500 could climb into the low 6,000s this quarter before retracing to fair value around 5,250 by early 2026. He’s also closely watching for a possible resurgence in inflation, noting similarities to the late inflationary stages of past periods like 1932-39, 1945-52, and 1967-74. If inflation does rise in a similar pattern, Bannister sees a high-risk period ahead for investors, especially during the final year of Fed Chair Jerome Powell’s term (May 2025 to May 2026). He adds that political pressures around the 2026 U.S. midterm elections could further amplify these risks. Bannister also notes that the S&P 500’s rising price-to-earnings (P/E) ratio, alongside the performance of growth stocks over value stocks, both appear overstretched. “Following recent political shifts, we may see a pullback in growth as fiscal populism, potential reflation, and geopolitical factors come into play,” he says. Historically, defensive stocks have tended to perform well during periods of slowing economic growth. Bannister suggests that the current environment favors “defensive value” sectors, including healthcare, utilities, and consumer staples, along with high-quality stocks.