Goldman Sachs: End of Golden Decade for S&P 500

Goldman Sachs has indicated that the decade-long golden era of the U.S. stock market will soon be a thing of the past. A new report from the firm's investment strategy research team forecasts that the S&P 500's annualized nominal return over the next 10 years will be 3%. This would place it at the 7th percentile since 1930. According to Goldman Sachs' data, this would also significantly lag behind the benchmark index's 13% annualized growth rate over the past decade.

The analysts wrote, "Investors should prepare for returns on stocks over the next decade to be near the lower end of their typical performance distribution, relative to bonds and inflation."

As an extension of this forecast, Goldman Sachs also believes that the performance of stocks over the next decade will struggle to outperform other assets. Based on its calculations, there is approximately a 72% chance that the S&P 500 will lag behind bonds by 2034, and a 33% chance it will lag behind inflation.

Five factors highlight Goldman Sachs' bleak outlook:

The bank stated that, first of all, stock market valuations at historical highs imply lower future returns. Current valuations are indeed high, with a cyclically adjusted price-to-earnings ratio of 38 times, at the 97th percentile.

Advertisement

Goldman Sachs said that the average cyclically adjusted price-to-earnings ratio for the S&P 500 is 22%.

Secondly, Goldman Sachs stated that market concentration is near its highest level in 100 years.

The analysts wrote, "When stock market concentration is high, the performance of the overall index largely depends on the prospects of a few stocks."

These stocks include large-cap technology stocks such as Nvidia and Alphabet, whose performance has driven the S&P 500 to rise by more than 20% so far this year. Although this has led the index to continuously set new historical highs this year, it has exposed the market to the risk of volatility and the need for diversification."Our historical analysis indicates that it is extremely difficult for any company to maintain a high level of sales growth and profit margins over a period of time. The same issue plagues a highly concentrated index. While some may find reasons to argue why tech stocks will maintain their growth momentum, history shows that revenues will slow down. Goldman Sachs stated that the revenue growth rate of S&P 500 constituent companies has been above 20%, but there was a significant decline after 10 years.

Thirdly, Goldman Sachs expects the U.S. economy to contract more frequently over the next 10 years. The company said that during this period, there will be four GDP contractions in the U.S., which is a 10% quarterly contraction. This number is higher than the two contractions in the previous 10 years.

Goldman Sachs also said that during these economic slowdowns, the annualized stock return rate is usually an average of -10%.

The fourth headwind in Goldman Sachs' forward-looking return model is corporate profitability. The company linked its rationale to the concentration argument mentioned above, saying that as the sales and profit growth of the largest stocks in the market slow down, it will have a huge impact on the entire market.

Finally, the fifth indicator is the relative level of the 10-year U.S. Treasury yield. Against the backdrop of a series of strong economic data releases and ongoing high inflation, investors have readjusted their expectations for rate cuts, and the yield on the 10-year U.S. Treasury has exceeded 4%."