In a report released right before the election last year, Goldman Sachs, a cornerstone of Wallstreet and heavyweight in investment banking, securities, and investment management, made a forecast that has left investors flummoxed.
Here’s what they said in the first bullet point of the report:
“We estimate the S&P 500 will deliver an annualized nominal total return of 3% during the next 10 years (7th percentile since 1930) and roughly 1% on a real basis. Annualized nominal returns between -1% and +7% represents a range of likely outcomes around our baseline forecast and reflects the uncertainty inherent in forecasting the future. During the past decade the S&P 500 posted a 13% annualized total return (58th percentile)”
Just 3% a year for the next decade and a minuscule 1% after adjusting for inflation?
That is naturally both surprising and alarming for investors who are heavily invested in stocks. Over a decade, a 3% annualized return estimate would mean a total return of just 34%. Those are only estimates of course, but they imply the equivalent of nearly another “Lost Decade” for stocks and one of the worst stretches since the Great Depression of the 1930s.
Goldman’s research indicates that bonds are 72% likely to outperform stocks over the next decade.
This is a huge shift from the traditional belief that stocks normally outperform bonds over the long term. And, bonds offer this higher return potential with a fraction of the risk associated with stocks.
Current data points, however, show that the economy is strong. Corporations are reporting solid earnings growth, and the Fed is planning to lower interest rates, which typically fuels growth in the stock market. However, last year’s 23% upswing was concentrated in just a handful of the biggest technology stocks, referred to as ‘the Magnificent Seven,’ led by companies like GPU maker Nvidia and Alphabet (Google’s parent company). The report emphasizes that it is difficult for any firm to sustain high levels of sales growth that equates to juicier profit margins over extended periods.
Importantly, the forecast does not suggest that we are heading towards a recession. Instead, it is based on two key factors.
The first is valuation: Goldman Sachs leans into the Cyclically Adjusted Price to Earnings (CAPE) ratio, a valuation measure used to predict future returns from equities over 10 to 20 years. According to the current CAPE ratio, stocks have only been more expensive 3% of the time throughout history. This strongly suggests that stocks are currently overpriced, which could limit their future returns.
The second factor is the over-concentration in tech stocks: Tech companies have been the star performers in recent years, driving up stock market indices. However, Goldman Sachs believes these tech companies will likely face increased competition in the future, which could limit their growth and, consequently, their contribution to stock market returns. Since they equate to a third of the S&P’s value, that could certainly have dire consequences.
This forecast is particularly noteworthy because the firm has no vested interest in promoting bonds over stocks. Like most investment firms, Goldman Sachs benefits primarily from higher stock prices. So this is no marketing ploy, which makes their prediction even more compelling and worthy of serious consideration by investors.
I will note though, that in the report, Goldman admitted that “Historically, our model has done a poor job of explaining returns across periods containing large shocks to the economic backdrop or periods of rapid technological change.” And it’s pretty obvious that what they’re saying indirectly is that, sometime in the next 10 years, the S&P is going to experience an epic fall, much like the financial crisis in 2008-9. At least that’s what their math concludes – as well as their model per their report.
Again, even their best case shows only 7%.
Going back decades, stocks have returned around 10% on an annualized basis.
There are a number of factors that could contribute to the S&P 500’s underperformance in the coming years. One is any rise in interest rates. Higher interest rates make it more expensive for companies to borrow money, which can slow down economic growth and hurt corporate profits. Another factor is the ongoing trade war between the United States and China. The trade war has disrupted global supply chains and raised costs for businesses. Trump’s plans for tariffs might have the same effect. This could also hurt corporate profits and weigh on the stock market.
What are the odds of a big crash within the next decade?
Pretty high actually, if history is taken into consideration. Since 1900, according to Morningstar and Investopedia, the market has had a pattern of crashing every 7 to 8 years. While 2022 was bad, it was a correction, not a full-on crash. It’s not an exact science, but there seems to be enough data to at least mention it. And oddly enough, their prediction coincides with another forecast made way back in 1875 by Samuel Benner.
Which has been surprisingly accurate for over a century.
Of course, there are also a number of factors that could lead to the S&P 500 outperforming Goldman Sachs’s expectations. One is the strong U.S. economy. The economy is currently growing at a healthy pace and unemployment is low. This could lead to continued growth in corporate profits and support the stock market. Another factor is the Federal Reserve’s dovish stance on interest rates. The Fed has indicated that it is willing to be patient in raising rates, which could help to support the stock market.
“See, we alerted everyone and people took steps to avoid the calamity.“
All that said, I always find it hilarious that the people who make these kinds of economic forecasts never, ever, admit they were wrong. Especially with regard to dire forecasts like this. If it does behave remotely like what they say it will, they’ll say “We warned you!”. And if it does the opposite, meaning better than their forecast, they’ll say “See, we alerted everyone and people took steps to avoid the calamity.”
Ultimately, the S&P 500’s performance over the next decade will depend on a number of factors as described above. But Goldman Sachs’s forecast is just one reason people are looking at other assets, like precious metals and crypto currencies, as a hedge against both downturns and inflation.
My favorite, of course, is Bitcoin. Compare Bitcoin’s potential future returns to all your other investments’ potential future returns. Be conservative on BTC returns. Be generous on the S&P 500’s returns. Keep analyzing. Keep running the numbers. And if you’re like me, you’ll start to wonder why you had 90+% of your investment savings in assets you fully expected to underperform Bitcoin.
The more I studied, the harder it became to NOT be all in. But that’s just me. Make the comparison on your own. Ignore all the Dr. Doom-like Peter Schiffs out there that say Bitcoin won’t live up to its predictable future.
Then wait until you have years of your own portfolio returns telling you the same thing you might be starting to realize now. You’ll be mad that you didn’t buy more BTC sooner. I sure was.
But chances are good that (even years from now) you’ll still be labeled as crazy because so few people will understand what you will so clearly understand.
Below is a link to a 10 minute interview with Goldman Sachs Chief US Equity Strategist, David Kostin, explaining their reasons for that prediction.
Here is the link to the original report:
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