The decade of outperformance for the S&P 500 may be over, Goldman Sachs says in a recent report.
More specifically, the bank predicts that the index will deliver a nominal annual return of just 3% over the next decade, significantly lower than the 13% annual return seen over the past 10 years. Adjusted for inflation, the real return is expected to be around 1%, ranking the forecast in the 7th percentile of historical 10-year returns since 1930.
A key factor behind this pessimistic outlook is the market’s high concentration, with the top 10 stocks now accounting for more than a third of the S&P 500’s total market capitalization.
“Today’s extremely high market concentration suggests that the benchmark S&P 500 equal-weighted index (SPW) is likely to outperform the cap-weighted total index (SPX) over the next decade by 200bps-800bps.” b. on an annual basis,” the Goldman report said.
Market concentration plays a key role in predicting long-term returns. Goldman argues that the concentration of profits in a few large-cap companies, particularly in the technology sector, raises concerns about sustainable growth.
Historically, it has been difficult for any company to sustain high levels of sales growth and profit margins for extended periods, and the same is true for a concentrated index. This makes it unlikely that the S&P 500 will continue to repeat the success of the previous decade.
Goldman also notes that the expected return of 3% could be 7% if the current level of market concentration were excluded from its model. According to the report, this concentration is now close to its highest level in 100 years.
The outlook for US stocks is further challenged by competition from other assets. Goldman points out that the combination of its 3% forecast and the current 4% yield on the 10-year US Treasury implies a 72% chance that stocks will underperform bonds over the next decade.
“Excluding the concentration, the probabilities of underperformance would be 7% and 1% respectively,” Goldman says in the report.
The bank also assigns a 33% chance that the S&P 500 will generate a below-inflation return through 2034.
Goldman’s forecast of a 3% annual return on a 10-year basis for the benchmark is significantly below the consensus average of 6%.
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Reference;
Karaahmetovic, V. (2024) S&P 500’s decade of big gains is over, Goldman says By Investing.com, Investing.com. Investing.com. Available at: https://www.investing.com/news/stock-market-news/sp-500s-decade-of-big-gains-is-over-goldman-says-3672429 (Accessed: 21 October 2024).
