DataTrek Research’s Nicholas Colas seems to have seen into the future as he recently predicted that the stock market will have doubled twice by 2040. In a note recently sent to subscribers, Nicholas observed that 20 years is the shortest period during which the S&P 500 (^GSPC) always produces a positive return, with an average annual returns of 10.7%, and a peak average return of around 17%.

“We can safely rule out a Volcker era-like period of declining interest rates that juice equity valuations,” he said. “We can also exclude a period of American global economic preeminence like the 1940 – 1950s unless China’s rise grinds to a sudden halt. The same sentiment applies to US population growth, which was 1.7 percent/year in 1961 (first peak S&P 20-year return) but just 0.3 percent now.”

Nicholas is of the belief that the capital market will gain strength through 2040 as a result of the accelerating efficiencies in the corporate.

“Since it will have to be increasing corporate earnings that take us there, and population growth is slack, technology-led productivity growth will have to supply the earnings leverage needed to achieve such returns,” he wrote. “Sitting here in 2021, it’s hard not to think that the pandemic causing a rapid acceleration in tech adoption wouldn’t be part of that answer.”

Companies accelerating structural changes to their operations remain a major theme of the pandemic. The phenomenon includes the adoption of next-generation tech, reduction of office space, and laying off workers. These changes are predicted to lead to amplified earnings growth as revenue growth slowly picks up.

“[W]e’d hazard a guess that the S&P 500 will compound at an average of 7.0 – 9.0% over the next 20 years, essentially doubling twice over the next 2 decades,” Colas said.

The projections are seemingly optimistic, considering that some market prognosticators have warned that the stock market will deliver lackluster or even negative returns on average for years.

“Bottom line: in very broad-brush strokes, the next 20 years for US equity returns will come down to how much technology enables widespread productivity growth that translates into earnings leverage across many different industries,” he added. “The last 10 years, which rescued us from an all-time worst 2-decade compounded S&P return, was largely about Tech companies getting first dibs on this trend. Over the next 20 years, that phenomenon will have to spread its wings to cover more of the US economy.”

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