Will the bull market have happy returns?

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Happy birthday, bull market. Here's to many more – but just in case, I hope you don't mind if I start pondering alternatives.

At six years and counting, the mammoth rally in the S&P 500 that began on March 9, 2009 has already lasted far longer than the 50-month average for previous bull markets.

Optimists will tell you that we're still far short of the nearly 148-month span of the great bull market of 1987 to 2000. And all the people trying to sell you stocks and mutual funds will be sure to pass on the observation that bull markets don't die of old age.

It's a comforting, if clichéd, thought. But in the never-ending battle of investing aphorisms, the obvious counterargument is to note that trees don't grow to the sky.

The S&P 500 index gained 225 per cent between March 2009 and the end of last month, according to Mackenzie Investments. Its profits to date stand well above the 155-per-cent average for bull markets of the past.

That is a lot of happy returns, so it's not out of place to celebrate the bull market's birthday by asking if it may be looking a tad expensive.

Some key indicators are flashing amber. For instance, the cyclically adjusted price-to-earnings ratio, or CAPE, which measures stock prices against their average inflation-adjusted earnings of the past decade, hovers around 27, far above its long-term average of 16.6.

Its current level, to be sure, is not quite as silly as it got during the dot-com bubble when it stood at more than 40. It's also true that the CAPE is a lousy timing mechanism: It can remain far above or below its long-term average for years at a time.

But the numbers don't tell an encouraging story about what lies ahead. Even in a benign case, where there's no crash but the CAPE just gradually, gently reverts to its long-term average over years, the implication is that future returns will be lacklustre compared to what we have witnessed in recent years.

Just how dismal? Any investor looking for a surefire ebullience cure should scan the seven-year forecasts put out by GMO, a Boston-based money manager that has a strong record of calling the market's twists and turns.

The firm's latest forecasts say that U.S. large-cap stocks, U.S. small-cap stocks, U.S. high-quality stocks, international large-cap stocks and international small-cap stocks will all lose money, in after-inflation terms, between now and 2022.

Capital Economics, a London-based economics consultancy, has developed its own version of CAPE, based on operating earnings per share. Its custom ratio agrees that this market is pricey, although it suggests the degree of overvaluation is a bit less than CAPE estimates. Nevertheless, Capital Economics sees next to no gains for the S&P 500 this year.

The obvious question is why investors are sticking around such an unpromising stock market. The obvious answer is that there's nowhere to run to.

Unlike the dot-com bubble, today's stock market has no glaringly cheap sectors. Meanwhile, bonds, the normal alternative for stock-shy investors, appear just as pricey as equities. Indeed, GMO's forecast sees most major types of bonds as losing propositions over the next seven years.

Traders like to joke that this bull market in stocks is being supported by TINA – short for There Is No Alternative. They're right.

"Given very low bond yields, investors have few substitutes for stocks," writes the research team at Pavilion Global Markets in Montreal. Their methodology calculates that the S&P 500 is about 31 per cent above fair value, while Canadian stocks are about 19 per cent overvalued.

By their reckoning, Japanese stocks (5 per cent undervalued), German stocks (42 per cent undervalued) and French stocks (43 per cent undervalued) all offer more tempting value than North American equities.

But the Pavilion group doesn't recommend any stampede out of Canadian and U.S. equities quite yet. Overvaluation, they point out, is not enough by itself to spell doom for the economy and the market. What's required is serious economic excess – and they don't believe that exists.

"In other words, it is too early to get out of stocks even if valuation is not appealing anymore," they write. But it may be time to start looking at foreign alternatives.