Investors in the US stock market could be heading into a prolonged period of disappointing returns. Vanguard and Fidelity expect stocks to generate less than half the annual gains recorded over the past decade. The cautious outlook comes amid Michael Burry's warning, as the famous investor believes Wall Street could be approaching another period of 15 to 20 years of minimal or negative real returns.
Vanguard's latest projections, along with Fidelity's capital-market estimates for the 20 years from 2025 through 2044, suggest it will be considerably more difficult to repeat the extraordinary gains recently achieved by investors in US stocks.
Vanguard expects US stocks to deliver annualized returns of between 4.8% and 6.8% over the next decade. Fidelity, meanwhile, projects an average annual return of 5.8% for US stocks over the next 20 years, equivalent to approximately 3.2% after inflation.
The forecasts stand in sharp contrast to the previous decade's performance. The S&P 500 delivered annualized returns of approximately 15.2% over the past 10 years, including reinvested dividends.
The implications could be especially significant for Americans nearing retirement who have built their financial plans on the assumption that stocks will continue to deliver returns close to their historical average of 10%.
Consider a 66-year-old retired engineer and his 63-year-old wife who have accumulated $2 million across retirement and investment accounts. The couple receives $4,000 a month in Social Security benefits, or $48,000 a year, but spends approximately $110,000 annually. They therefore need to withdraw another $62,000 from their investments to cover their expenses.
If their portfolio generates an annual return of 10%, the couple could retain approximately $3.99 million by age 76, despite withdrawing money throughout the decade.
However, with an annual return of 5.8%, the projected balance falls to approximately $2.57 million. That represents a difference of nearly $1.43 million.
The calculation assumes that annual withdrawals increase by 2.5% to offset inflation. It also illustrates why retirement planning based on the market's past performance could create unrealistic expectations about future wealth.
The projections have also renewed attention to Burry's warning about the possibility of another prolonged period of disappointing stock-market returns.
In an October Substack post, the investor, whose story was portrayed in The Big Short, questioned whether investors were prepared to face 15 to 20 years of negative or minimal inflation-adjusted returns.
“If another period of 15 to 20 years of negative or low real returns in stocks is coming, wouldn't it be good to know?” Burry wrote.
The investor identified three historical periods in which the S&P 500 suffered significant inflation-adjusted price declines. Between 1966 and 1982, the index's real price fell by approximately 53%, excluding dividends. The decline was about 58% between 1929 and 1949, while the period from 2000 to 2011 produced a drop of nearly 40%.
Burry acknowledged that reinvested dividends substantially reduced those losses, showing that prolonged periods of weak market performance do not necessarily translate into permanent losses for investors.
His broader concern is that high valuations, speculative behavior and a resurgence in inflationary pressures could weaken future returns, even if the market avoids another catastrophic downturn.
It is important to note that Vanguard and Fidelity are not forecasting a lost decade. Their estimates refer to average nominal returns over different investment horizons, while Burry's warning focuses on inflation-adjusted performance.
Disclaimer: The content published by our digital media outlets is for informational purposes only and does not constitute investment advice. Conduct your own analysis or seek professional advice before investing. Remember that investments are subject to market risks and that past performance does not guarantee future returns.