The central question Schroders poses in its September 2026 Equity Lens1 is deceptively simple: by how much should investors expect equities to outperform government bonds over the long run? The answer, as the report makes clear across 60-plus slides of historical analysis, current data, and forward-looking decompositions, is that the answer depends almost entirely on whether earnings deliver.
155 Years of History, and Why It May Not Be Enough
The historical baseline is striking. Over 155 years of U.S. market data from 1871 to August 2026, equities returned 9.4% annually versus 4.6% for long-term government bonds, a gap of 4.8%. Inflation running at 2.1% over that period implies a real equity return of approximately 7.3% and a real bond return near 2.5%. Those are useful anchors. They are not guarantees.
Schroders is direct about the complication: starting point matters enormously on a 10-year horizon. Rolling 10-year return differences have ranged from deeply negative to well above 20% annualized, depending on when an investor entered. The "yield gap" — the spread between the equity earnings yield and the 10-year Treasury yield — has historically shown meaningful predictive power over 10-year horizons (correlation of 0.5), but close to none over one year (correlation of -0.2). That asymmetry is not reassuring in the near term.
The current yield gap is, by Schroders' assessment, depressed — a negative signal for the medium to long term. Yet the report provides an important qualification: there have been notable historical episodes where a low yield gap preceded strong equity outperformance anyway. The engine behind those positive surprises was consistently the same — real EPS growth of around 10% or more per year, often paired with declining valuations.
Consensus Forecasts Are Historically Aggressive
This is where the analysis becomes both the most compelling and the most uncomfortable. Consensus earnings growth expectations for U.S. equities as of the report date are, in Schroders' words, "consistent with tremendously strong real EPS growth": 32% for 2026, 16% for 2027, 16% for 2028, and 25% for the long-term 2029-30 period. The report notes the long-term growth forecast is "higher even than in the Dotcom era." That is not a reassuring comparison.
And yet, if those forecasts are believed, the implied equity return premium over bonds has actually been rising even as bond yields have climbed. Incorporating consensus upgrades into a discounted cash flow framework, Schroders finds that the equity bull case "can remain intact so long as" earnings momentum continues. Earnings revisions across the U.S., UK, Europe, and Japan all remain in upgrade territory as of August 2026. The case is real. It is also conditional.
2026: The Year Value Stopped Apologizing
The 2026 performance recap is a study in reversals. Value has outperformed growth across every major region. Emerging markets and Japan have outperformed the U.S. Within the U.S., small caps have outperformed large caps, and the Magnificent-7 has lagged — returning 9% year-to-date, below the 15% recorded by large caps ex-Mag-7. Perhaps most striking is the report's observation that UK and European value stocks have outperformed the S&P 500 over 1, 3, and 5 years, a fact that confounds the narratives that dominated much of the prior decade.
Beneath those returns, the driver is consistent: earnings, not multiple expansion. Across most markets, valuations have actually contracted in 2026. Earnings are doing the lifting.
Valuations Remain Elevated Almost Everywhere
Despite that earnings-driven discipline in 2026, the valuation picture at the aggregate level remains stretched. Against a 20-year median, the U.S. CAPE sits 57% above historical median. Price-to-book is 93% above median. The only notable exception in the major markets is the emerging markets forward P/E, which sits 15% below its 20-year median. Schroders is appropriately cautious on that signal, noting it "hinges on whether sky-high consensus earnings growth forecasts materialise." EM's apparent cheapness is a function of extraordinary earnings expectations, not structural undervaluation.
At the individual sector level, consumer staples and healthcare stand out as less expensively valued relative to their own histories. Technology, on a CAPE basis, sits 113% above its 20-year median. Communication services is 84% above. These are not benign numbers.
Five Key Takeaways for Advisors and Investors
- The equity case rests on earnings delivery, not valuation support. With the yield gap compressed and most valuation measures elevated, the only credible path to strong equity outperformance over the next decade runs through exceptionally strong real EPS growth. Consensus forecasts are historically aggressive. Advisors should stress-test client expectations accordingly.
- Value is working, globally and across time horizons. UK and European value have outperformed the S&P 500 over 1, 3, and 5 years. The 2026 YTD story reinforces this across all major regions. The decade-long narrative of growth dominance deserves active reassessment.
- Small caps offer relative valuation support. On a forward P/E basis, small caps trade at a discount to large caps both in the U.S. and internationally, a reversal of the premium that prevailed for much of the prior cycle. For longer-horizon investors, that discount is a credible starting point.
- Selling on volatility has been costly and likely remains so. Schroders' data shows that moving to cash when the VIX exceeded its top 5% historical range would have reduced a $100 investment (starting 1990) from $3,941 to $825 by end-2025. The behavioural risk of volatility-driven exits is quantifiable and significant.
- EM warrants scrutiny, not a blanket discount. The apparently cheap forward P/E in emerging markets is entirely a function of extraordinary consensus earnings growth expectations. Advisors should evaluate EM exposure by assessing the credibility of those forecasts rather than treating the low multiple as a simple value signal.
Footnote:
1 Schroders. Schroders Equity Lens: September 2026. Schroders Investment Management, September 2026. https://theideafarm.com/wp-content/uploads/2026/09/Schroders-Equity-Lens-September-2026.pdf
