I’ve often described what I call the Iron Law of Valuation: the higher the price investors pay for a given set of expected future cash flows, the lower the long-term investment returns they should expect. As a result, it’s precisely when past investment returns look most glorious that future investment returns are likely to be most dismal, and vice-versa.

Market returns and economic growth have underlying drivers. At their core, extended periods of extraordinary growth and disappointing collapse reflect large moves in those drivers from one extreme to another. Extrapolation becomes a very bad idea once those extremes are reached.

For example, from 1982 to 2000, the S&P 500 enjoyed an extraordinary period of total returns averaging just over 20% annually. The primary driver of those gains wasn’t growth in revenue or earnings (though the combination of 4.6% average annual S&P 500 revenue growth and a high starting dividend yield certainly helped). No, the primary driver was expansion in the S&P 500 price/revenue ratio, which rose from a profound low of 0.3 in 1982, to an offensively extreme 2.2 by the 2000 peak.

Conversely, in the 9-year period from 2000 to 2009, the S&P 500 lost half of its value despite positive overall growth in revenue and earnings. The reason was that the S&P 500 price/revenue ratio collapsed from 2.2 to less than 0.7 over that period – a retreat that even 9 years of 4.7% annual revenue growth was wholly unable to offset.

From 2009 to 2018, the S&P 500 price revenue ratio advanced from less than 0.7 to a breathtaking multiple of 2.4 early this year – the highest level in the history of the U.S. stock market. Extrapolating the market gains of these past several years, as if they are somehow a birthright of passive investing, is likely to have brutal consequences for investors.

Market returns and economic growth have underlying drivers. At their core, long periods of extraordinary growth and disappointing collapse reflect large moves in those drivers from one extreme to another. Extrapolation becomes a very bad idea once those extremes are reached.

The upshot is this. Measured from their highs of early-2018, we presently estimate that the completion of the current cycle will result in market losses on the order of -64% for the S&P 500 Index, -57% for the Nasdaq 100 Index, -68% for the Russell 2000 Index, and nearly -69% for the Dow Jones Industrial Average.

These estimates undoubtedly seem preposterous, as was my March 2000 projection of an -83% plunge in technology stocks (the tech-heavy Nasdaq 100 lost an implausibly precise -83% in the subsequent 2000-2002 collapse), as was my projection in 2000 that the S&P 500 would likely suffer negative total returns over the following decade (it did), as was my April 2007 estimate that the S&P 500 could lose -40%, not to become deeply undervalued, but simply to reach valuations that were “standard, normal, commonplace” (the S&P 500 went on to lose -55% in the subsequent 2007-2009 collapse, though I emphasized in late-2008 – after the S&P 500 had indeed collapsed by more than -40% – that “The best way to begin this comment is to reiterate that U.S. stocks are now undervalued”).