The question of how much return, on average over a longer period of time, one can expect from their equity portfolio is truly warranted.
According to the findings of DataTrek, equity investors should expect an annual average of 7%, with the upside potential dependent on the pace of technological innovation to come.
Why only 7%?
Historically, high average annual returns of above 14% have happened only 22% of the time. These returns followed periods of specific events such as a) great depression, b) equity market corrections, and c) catalysts such as post-WWII (rebuilding Europe).
More importantly, historic returns of 10% to 14% occurred on the back of accommodating macroeconomics, decreasing interest rates, stable geopolitics and bits and pieces of historic innovations that got turned into products addressing mass markets. Population growth is another important factor. The US economy has been addressing an ever-larger number of consumers over the last 50 years. In contrast, the same did not occur in Europe.
Going forward, one should expect a sub-1% population growth for developed markets with some regions expected to become net losers. Also, the trend that innovation will be turned into mass products will not change anytime soon.
Innovation is presently led by IT with a particular focus to reshuffle the B2C relationship, i.e., to make this relationship leaner, faster, and more user responsive. Therefore, the trend of technology stocks outperforming the broader market will not change. Consequently, the IT sector merits a structural overweight.
The flip side of this assumption is the following: should political instability lead to loss of competitiveness, then innovation related growth will be absent. This will result in much lower EPS growth and, therefore, lower stock market valuations and sub-par performances.