My friend James Montier, now at GMO, and his associate Matt Kadnar have written a compelling piece on why passive investors should avoid the S&P 500. Their essay argues that the forward growth potential of the S&P 500 is significantly lower than that of other opportunities, especially emerging markets. Let’s look at a few of their charts. For the Next 7 Years, S&P 500 Returns Will be a Negative 3.9% The chart above breaks the total return from the beginning of the current bull market in the S&P 500 into its four main components: increasing multiples, margin expansion, growth, and dividends. Mauldin Economics He notes that this total return is more than double the level of long-term real return growth since 1970. Mauldin Economics If earnings and dividends are remarkably stable (and they are), to believe that the S&P will continue delivering the wonderful returns we have experienced over the last seven years is to believe that P/Es and margins will continue to expand just as they have over the last seven years.