GMO's forecasts are based on an assumption stocks mean revert to an expected return in line with historical averages (6.5% real) within 7 years. But there is no law of the universe that says investors are entitled to 6.5% real and stocks will always generate that level of return.
https://twitter.com/JCoumarianos/status/1364326621222682626
GMO has now consistently undervalued the market for 20-30 years running. They have done this because they continue to make an unsound assumption the cost of capital is fixed through time, when in reality it evolves/changes, and has a tendency to decline over time.
I'm not saying certain markets are not expensive. They are. But a much better approach is to work out what return is implied by current valuations on an IRR/DDM basis, not what the return would be if asset prices declined so as to offer a much higher return in the future.
My assessment is that the US market is priced for about a 5-7 nominal return, which equates to perhaps 4.5% real. If I'm right on that, your expected return is 4.5% real, not a big negative number that assumes stocks reprice to 6.5% real, which may simply be wishful thinking.
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