The performance of U.S. equities has far surpassed the debt markets this year, and investors are hoping the trend will continue if recent shifts in asset allocations are any guide. But do stocks really have that much of an edge over bonds?
John Higgins, chief markets economist at Capital Economics doesn't seem to think so. According to him, the outperformance of U.S. equities over Treasurys won't be a lot higher in the next decade.
"Many [investors] expect the superior performance of equities to continue. While possible, we doubt it will be especially pronounced," Higgins said in a note on Tuesday.
Capital Economics expects the average annual real return from U.S. equities to be only 0.9 percent in the next 10 years if the U.S. Federal Reserve meets its 2 percent inflation target, compared to a 0.8 percent gain from bonds in the same period.
That compares to returns of over 18 percent from U.S. equities so far this year, while returns from 7 and 10-year Treasurys are down 6 percent.
The reason the predicted real return from equities is "barely" more than bonds is because cyclically adjusted price to earnings (P/E) ratios and earnings for listed companies are high compared to their long-run averages, Higgins said.
"If each (P/E and profit margins) were to revert to their mean, each would exert large drags on the total return," Higgins added.