In the tumultuous landscape of U.S. equities, where volatility has become the norm, investors are grappling with a conundrum: are lackluster dividends on the horizon for the next decade? The journey of the S&P 500® in the 2020s has been nothing short of a rollercoaster ride, marked by sharp declines, staggering rallies, and record highs. But amidst this whirlwind, a deeper analysis of S&P 500 Annual Dividend Index futures unveils a sobering reality – expectations for nominal dividend growth over the next decade hover around near-zero levels.
Figure 1: Futures price near-zero growth in dividend payments over the coming decade
Understanding the Dynamics
The introduction of S&P 500 Annual Dividend Index futures by CME Group in 2015 offered investors a unique window into future dividend expectations, serving as a barometer for corporate earnings projections over the ensuing decade. What’s striking is the prevailing sentiment among investors: a pessimistic outlook on dividends, especially when adjusted for inflation. This sentiment is reflected in the futures curve, which suggests a sharp decline in real dividend payouts over the coming years.
Figure 2: Since early 2017, S&P 500 is up 116%, expected dividends up only 29%
Discrepancies and Divergence
One glaring inconsistency lies in the disparity between the meteoric rise of the S&P 500 index and the tepid growth projections for future dividend payments. While the S&P 500 surged by 116% from early 2017 to January 2024, expectations for dividend payments increased by a mere 29% over the same period. This raises a pertinent question: How can the stock market rally to record highs when future dividends are anticipated to stagnate?
Figure 3: The S&P moved in lockstep with the NPV of dividends until the Fed restarted QE
Figure 4: Falling rates raised the NPV of dividends from 2017-2020 but not since
The Pre- and Post-Pandemic Divide
To unravel this puzzle, we must dissect the market dynamics before and after the onset of the COVID-19 pandemic. Pre-pandemic, the correlation between the S&P 500 and the Net Present Value (NPV) of future dividend index futures was evident, with falling bond yields driving stock market gains. However, the divergence became pronounced post-March 2020, as massive fiscal stimulus packages and unprecedented quantitative easing measures injected liquidity into the market, propelling equities to unprecedented heights.
Figure 5: QE may have boosted stocks but QT doesn’t seem to have hurt them (yet)
The Role of Fiscal and Monetary Policies
The CARES Act, coupled with the Federal Reserve’s aggressive monetary policies, unleashed a torrent of liquidity into the market, fueling the stock market rally. Despite subsequent efforts to taper quantitative easing and address inflationary pressures, the lingering effects of the stimulus continue to shape market dynamics. Moreover, the recent global downturn in inflation rates has further buoyed investor sentiment, overshadowing concerns about tightening monetary policies.
Assessing the Future Outlook
As we navigate the market landscape in early 2024, the outlook for dividend growth appears muted. Corporate earnings, already near record highs relative to GDP, face headwinds amid a potential economic slowdown and rising interest rates. The specter of a recession looms large, with historical precedents highlighting the vulnerability of dividends and equities during economic downturns.
The Optimism Amidst Pessimism
Yet, amidst the prevailing pessimism, there are glimmers of optimism. Past trends, such as the resilience of dividend payments during the inflationary 1970s, offer a counterpoint to the prevailing narrative. Moreover, recent surprises in dividend growth underscore the inherent unpredictability of market dynamics, hinting at the possibility of an upward trajectory in dividends.
Conclusion
In conclusion, while the specter of lackluster dividends looms over the next decade, investors must tread cautiously amidst the volatile landscape of equities. While the divergence between stock market performance and dividend expectations raises concerns, historical precedents and unforeseen market dynamics remind us of the inherent uncertainty in forecasting future trends. As we navigate the complexities of the market, a balanced approach, informed by rigorous analysis and prudent risk management, remains paramount in achieving long-term investment objectives.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with a qualified financial advisor before making investment decisions.
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