Goldman Sachs recently projected that the S&P 500 index will yield only a 3% annualized nominal return over the next decade. This conservative forecast has sparked a heated debate on Wall Street, with several experts challenging the outlook. The firm attributes the expected low returns to a weakening economy, high market concentration, and surging U.S. Treasury yields.
According to Goldman Sachs, these challenges could lead to the S&P 500's future returns significantly underperforming its average annualized return of 13% over the past decade. In their latest report, they further emphasized their stance, suggesting that the golden era of the S&P 500 may be ending.
Goldman identified that only a small fraction of S&P 500 companies have maintained high sales growth. From 1985, just 11% of companies have sustained a sales growth rate of 10% or more for a decade, with only 3% achieving 20% or more.
The index's market concentration has reached a century-high level, with the largest stocks' market value being over 700 times that of the 75th percentile stock. This concentration typically suggests lower future returns for the S&P 500, except during recessionary periods.
Since the beginning of the year, the S&P 500's total returns have lagged behind other indices such as the Russell 1000 index, Bitcoin, and gold. Moreover, it has also underperformed compared to the S&P 500 Equal Weight Index (SPW) and the S&P MidCap 400 Index (S&P 400).
Goldman Sachs' strategists recommend investors consider other indices like SPW and S&P 400, which they believe have stronger future potential. These alternative investments reflect the strength of the U.S. economy, as well as the profit and innovation capacity of American companies beyond large-cap and market-cap-weighted indices.
For the current year, the S&P 500 has risen approximately 23%, with companies showing strong performance this quarter. FactSet data reveals that 75% of reporting companies have exceeded earnings expectations, aligning with the ten-year average.
Despite the long-term cautious outlook, Goldman Sachs remains optimistic about the short-term performance of the S&P 500, forecasting an 8% earnings per share growth by the end of 2024, and an 11% rise in the following year. They also predict the index could reach 6,300 points in the next 12 months, representing an 8% increase from current levels.
