This settles the debate on stock market valuation between David Tepper and Nelson Peltz.

It would be easy to throw a coin, of course. If super wealthy Wall Street managers may not agree, despite having access to huge research budgets and leading analysts, what information can we throw to the market ?

This question becomes even more urgent right now, when companies literally have no idea what their earnings and earnings will be in the next few quarters. As I noted a week ago, quoting Kathleen Houssels, Global Investment Director at AXA Rosenberg Investment Management, "traditional quantitative factors such as value, growth and quality will no longer have sense because the impact of the coronavirus affects the financial statements. the company".

However, there is one valuation indicator with excellent long-term history that is not based on profit or income projections: the Q ratio, which is calculated by dividing the market value by the cost of replacing assets. This relationship was introduced by the late James Tobin, Nobel Prize winner in 1981.

The table at the top of this article, based on data from Andrew Smithers, British economic consultant.

, plots the Q-Ratio for the S&P 500 index
SPX
+ 1.15%

since 1900. Higher levels mean that the market is more overvalued and that the Q ratio is currently well above the average of the last century. In fact, in mid-May, it was at the 97th percentile of the historic distribution, surpassed only by the peak of the stock market before the crash of 1929 and at the peak of the Internet bubble in early 2000.

What it means: The bottom line of COVID-19-induced bear market and the ensuing recovery is a slightly less overvalued stock market than at the most overvalued points of the last century.

To appreciate what this means for the future, I built an econometric model based on the historical correlation of the Q ratio with the inflation-adjusted returns and the annualized dividend S&P 500 over 10 years. This model has in the past been able to explain or predict 52% of the variations in 10-year market yields (depending on its r-squared). It is one of the highest r-squares you can find in the stock market forecasting industry.

The following summarizes the predictions this model makes on the total real stock market return over the next decade:

From	Projected total annualized return of the S&P 500 over 10 years
December 31, 2019	-4.00%
An absolute record on February 19	-4.70%
Market under March 23	-1.10%
End of the first quarter.	-2.20%
May 14	-3.00%

As you can see, the expected return on the S&P 500 today is nearly two percentage points annualized worse than the market low on March 23, and only one percentage point annualized better than at the start. of the year.

What about the next 12 months?

As with any valuation indicator, the Q-Ratio sheds relatively little light on short-term market returns. The r-square is only 5%, in fact, when the ratio is used to predict 12-month returns for the S&P 500, just one-tenth of what it is for returns on 10 years.

In any case, the Q-Ratio currently predicts that the dividend-adjusted S&P 500 will produce a return over the next 12 months, 0.9% below inflation.

Whether you think the good news or the bad news depends on your expectations. If, like some, you think the economy is about to enter a dark winter of global depression, a 0.9% loss doesn't seem like such a horrible prospect. But you will be disappointed if you expect a rapid V-shaped recovery to push the stock market to new heights.

However, remember that the Q-Ratio projection of market performance over the next 10 years is much more confident than your 12-month forecast.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert notes follow investment newsletters that pay fixed fees to be audited. He can be contacted at [email protected].