Goldman Sachs forecasts that the S&P 500 will produce an annualized nominal total return of just 3% over the next ten years. This is a sharp contrast to the 13% annual return the index delivered over the last decade. David Kostin and his equity strategy team cite the high concentration in a few stocks and lofty valuation levels as the main reasons for their bearish outlook.
They note that the recent returns have been driven by a small number of stocks, like Nvidia and Alphabet, which they call “the Magnificent Seven.
The intuition for why concentration matters for long-term returns relates to growth in addition to valuation,” the team stated in their strategy paper. Our historical analyses show that it is extremely difficult for any firm to maintain high levels of sales growth and profit margins over sustained periods.
The team also points to the historically high valuation of the market, using the cyclically adjusted price-earnings ratio (CAPE). Currently, the CAPE ratio stands at 38 times, placing it in the 97th percentile.
The model suggests a 72% probability that stocks will underperform bonds over the next decade. However, not everyone agrees with this pessimistic forecast. JPMorgan Asset Management expects large-cap U.S. stocks to “return an annualized 6.7% over the next 10-15 years,” according to David Kelly.
Goldman Sachs forecasts lower S&P returns
Ed Yardeni of Yardeni Research also holds an optimistic view, suggesting productivity growth and strong profit margins will propel stock prices higher. Nicholas Colas, co-founder of Datatrek Research, believes the S&P 500 returns will be at least as strong as the historical average of 10.6%, and possibly better.
He notes that historical cases of returns below 3% were linked to significant crises, and without a comparable crisis on the horizon, he finds the pessimistic forecast challenging to justify. Despite the differing opinions, some stocks are still expected to outperform the market by 2025. Apple, with its innovative products and robust ecosystem of services, is one such stock.
Amazon, with its dominance in e-commerce and cloud computing, is another. And Tesla, with its leadership in electric vehicles and sustainable energy solutions, rounds out the list of top picks. As always, predicting long-term returns is a difficult task, and only time will tell which forecast proves to be more accurate.
But for now, investors will have to weigh the different perspectives and make their own judgments about the future of the market.
