Quality Investing with René Sellmann

Quality Investing with René Sellmann

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Quality Investing with René Sellmann
Quality Investing with René Sellmann
4 Ways to Assess The Current State of the US Stock Market and Its Future Prospects
Processes & Mental Models

4 Ways to Assess The Current State of the US Stock Market and Its Future Prospects

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Rene
Mar 23, 2025
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Quality Investing with René Sellmann
Quality Investing with René Sellmann
4 Ways to Assess The Current State of the US Stock Market and Its Future Prospects
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The U.S. stock market, often represented by the S&P 500, has been a wealth-building engine for decades.

According to the Dimson–Marsh–Staunton dataset—featured in the Credit Suisse Global Investment Returns Yearbook—the U.S. equity market has produced inflation-adjusted returns of about 6.5%–7% per year since 1900. This places it among the top-performing stock markets over more than a century. The dataset covers dozens of countries, revealing how different markets navigated wars, economic disruptions, and technological shifts. Thanks to the size and resilience of its capital markets, the U.S. has consistently stood out in these long-run comparisons.

But with valuations stretched and recent performance outpacing historical norms, investors are left wondering: what should we expect going forward? In this post, I’ll share four distinct ways to approach the current state of the U.S. stock market and what they suggest about future returns.

1. Base Rates: Learning from History

When assessing the stock market’s future, a powerful starting point is the concept of base rates.

Popularized by Michael Mauboussin, a leading thinker in intelligent value investing, behavioral finance, and investment strategy, base rates refer to the statistical outcomes of a broad reference class—think of them as the typical results you’d expect based on historical data, rather than a making specific prediction based on intuition, personal experience, or anecdotal evidence.

In his work, like The Success Equation and various research papers, Mauboussin emphasizes using base rates to anchor our expectations, especially in complex systems like markets where intuition alone can mislead.

This ties into his distinction between the inside view and the outside view.

  • The inside view is our tendency to focus on the specifics of the current situation—say, today’s tech boom, interest rates, or earnings growth—and craft a narrative around why “this time is different.”

  • The outside view, by contrast, steps back and asks: What happened in similar situations historically? It’s about leveraging the base rate of past outcomes to temper optimism or pessimism.

Mauboussin argues that the outside view often yields better forecasts because it sidesteps our biases and grounds us in reality.

Take the S&P 500 as an example. A friend shared a chart from Bridgewater Associates, Ray Dalio’s hedge fund, showing annualized returns over rolling 15-year periods from 1970 to today.

(Source: Bridgewater Associates)

The last 15 years (2010–2024) stand out: the best 15-year stretch in that sample.

"Out of any 15-year period to be invested in equities dating back to 1970, the one we've just lived through was the best. Stocks (especially U.S. stocks) have been on a relentless tear, with any dips quickly fading into memory. Returns have been more than double the average. This run-up has enriched investors greatly.”

Periods of such exceptional performance—like the post-WWII boom or the 1990s tech rally—are outliers, not the norm. If we take the outside view and look at the base rate of 15-year returns, the data suggests that after a peak period, the next 15 years rarely match it. Reversion to the mean kicks in, pulling results back toward—or below—the historical average.

Expecting another 12-15% annualized return from here is an inside-view trap (most likely influenced by recency bias); the outside view says a lower rate of return—below the S&P’s long-term average—is more plausible.

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