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Welcome to the 4% return market

November 19, 2013: 5:00 AM ET

The market is up, but Wall Street has less to be excited about now.

130827162132-nyse-premarkets-082713-620xaFORTUNE -- The stock market probably isn't in a bubble, but there's a bigger risk you need to consider: That buying now will mean much lower returns over the next few years.

The valuation on the S&P 500 is still reasonable enough – a P/E of 16.6, based on trailing earnings, which is only slightly higher than average.

That's good news if you're worried about a crash. But if you want 10% long-term returns? Or even 8%? You're going to be disappointed.

MORE: Stocks not in a bubble? Hold on there Yellen

In fact, try 4%.

On average, going back to the 1930s, the market has risen just 4% a year in the following decade when stocks have traded for a similar P/E as they are now, according to Birinyi Associates.

And among a growing group of forecasters, 4% is becoming something of a consensus.

Bridgewater's Ray Dalio last week said that's what he expects from the market for the next decade.

MORE: Why should JPMorgan and Twitter have to pay more taxes?

Robert Shiller says his calculations suggest stocks will rise about 2.5% a year for the next decade, plus inflation, which has recently been averaging 1.5%. Cliff Asness, who runs AQR, which manages one of the largest hedge funds in the world, says they will rise 4.5% annually on average.

4% is not horrible. After the two big stock drops of the 2000s, the market basically went nowhere for the following decade. In a 4% market, with compounded returns, the money you put in the market now will be worth nearly 50% more in a decade.

So while it might not be time to be scared of the market -- the economy is improving -- it's certainly a time to be less excited about it.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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