A quarter century of financial market returns

While India delivered the best real returns over the last 25 years, high valuations may make this tough to sustain

- AKASH PRAKASH

I had the opportunity to go through a very interesting study put out by Jim Reid and his team at DB Bank, focusing on financial market returns over the past 25 years. The study is exhaustive and filled with data and insights. It looks at returns over the 25-year period from January 2000 to the end of 2024. The following statistics stood out to me.

While most of us have come to accept American exceptionalism in the financial markets - with the US accounting for nearly 65 per cent of global equity indices and reaching new highs with back-to-back years of over 20 per cent returns - the last quarter century has not been a particularly great period for US equities in a historical context.

In the last 25 years, US equities (S&P 500) have delivered a real equity return of 4.9 per cent per annum, which is the second-worst 25-year return among the nine 25-year blocks going back to 1800. Over the last 100 years, US equities have delivered real annualised returns of 7.3 per cent, making the 4.9 per cent significantly below the long-term trend.

How can this be true, given the new highs at which the markets are trading? What about the Magnificent 7 and their dominance of returns? Are we not near all-time high valuations, in the top 1 per cent of market history?

The truth behind this poor relative performance of US equities lies in the starting point valuations. The start of the year 2000 marked the peak of the internet bubble, with the S&P 500 reaching its highest cyclically-adjusted price-to-earnings (P/E) ratio in history. Despite valuations returning to near-peak levels today (at the end of the 25-year period) and being in the midst of a bull market, the starting valuations were so high that they created a significant drag on returns. If we look at the entire 25-year period, it took until 2013 for equity real returns to cross the real returns of US Treasury bills (cash proxy).