Goldman Sachs Predicts Decade of Weak Returns for S&P 500
In a recent forecast, Goldman Sachs has projected a challenging decade ahead for the S&P 500, predicting nominal annualized returns of just 3% over the next 10 years. This stark outlook stands in sharp contrast to the index’s historical performance, which has averaged a 13% annualized return over the past decade.
The investment bank cites several factors contributing to this bearish prediction, including a weakening economy, high market concentration, and unfavorable Treasury yields. These conditions are expected to create headwinds for the broader market, potentially leading to subdued returns for investors.
Analysis of corporate earnings data dating back to 1985 reveals that only a small percentage of S&P 500 companies have maintained high sales growth over extended periods. Specifically, just 11% of companies have sustained 10% or higher sales growth over 10 years, while a mere 3% have achieved 20% or higher sales growth for the same duration.
Market concentration within the S&P 500 has reached historic highs, with the largest stock now boasting a market capitalization over 700 times that of the 75th percentile stock. This level of concentration is unprecedented in nearly a century and typically correlates with poorer returns over subsequent decades, except during recessionary periods.
The S&P 500’s relative underperformance compared to other assets and indices is also noteworthy. Total returns have lagged behind the Russell 1000, bitcoin, gold, and even its equal-weight counterpart (SPW) and mid-cap stocks (S&P 400). In light of these trends, Goldman Sachs suggests investors consider alternative indices with more favorable conditions for strong performance.
Despite the long-term concerns, the short-term outlook for the S&P 500 remains positive. The index is up 23% year-to-date, with strong corporate earnings this quarter. Approximately 75% of companies have beaten earnings estimates, aligning with the 10-year average. Goldman Sachs maintains a bullish stance on short-term S&P 500 performance, forecasting 8% EPS growth by the end of 2024 and 11% growth the following year.
Looking ahead, the investment bank projects the S&P 500 to reach 6,300 over the next 12 months, indicating an 8% upside from current levels. However, investors should remain cautious and consider diversifying their portfolios in light of the anticipated long-term challenges facing the index.