Hussman hits on two of the three critical issues: profit margins (which will mean revert negatively) and the distinction between reported earnings and operating earnings (use of the latter makes the P/E appear lower than it really is). (Although Hussman doesn’t mention the more pervasive use of stock options these days as compared to decades ago which dilutes the real P/E.) I think there’s one more issue to think about (with respect to the S&P specifically): dividends.

Prior to the late-1980s, dividends comprised almost half of the 10% annualized long-term return on the S&P. Well, the current dividend yield is about 1.5%. If you assume 6% nominal long-term earnings growth (3% inflation + 1.5% population growth + 1.5% productivity growth), that gets you to a return of 7.5% annually on the S&P over the long term IF MARGINS AND VALUATIONS REMAIN HIGH, as they are currently, which has historically been a bad bet. The other issue is that the risk-free return on the 10-year treasury is about 5.25%. If you’re willing to accept the volatility of the S&P (standard deviation of about 20% per year) to get a 2.25% premium over risk-free treasuries (standard deviation of about 5% per year), then you’ve got a very unusual appetite for risk. And, again, that 7.5% is a very optimistic projection.

Assuming some mean reversion on margins, the S&P probably won’t return more than about 5% or so over the next decade. That’s not particularly exciting considering that you can get 5.25% risk free owning treasuries. Stocks generically are a sucker’s bet right now.