Returns are driven by surprise: positive returns are driven by non-consensus positive surprises; negative returns are driven by non-consensus negative surprises.

The surprises that bound returns are themselves bounded by capacity to surprise.

Historically, the capacity to surprise follows from room to ease interest rates, which lowers the discounting of future cash flows. The lower the discount rate, the more you can treat future cash flows as just about equivalent to the present, which raises valuations everywhere. Easing interest rates more than what is priced in by consensus delivers positive returns.

So where are we now? In the United States, the ten year Treasury sits at just over 100 bps. Past interest rate surprises have been driven by the fall from 15% interest rates in 1981 to 1% today. The capacity for future interest rate surprises is bounded by how low the nominal 10 year rate can go.

How low can it go? Negative rate territory is not unprecedented. In Japan, 10-year JGBs have hit -77bps. The lower bound can theoretically be lower, but likely not an order of magnitude difference; we can roughly assume we have about 2% more to ease.

In absolute terms, 2% is not much; however, there are some interesting math questions around the zero bound to explore in the future. As a first approximation, the room to surprise to the upside for interest rates is significantly lower than it was in the past.

As it applies to US Equities specifically, the future expected returns don't look nearly as good as they have in the past. Barring minor deviations, the expected return looks like low-single digits, alarming close to zero, annualized, for the next ten years.

Though equities look better than the measly 100 bp yield from a Treasury, the question to ask is: do the expected future returns of US equities look viable from a risk premium perspective?

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