Goldman Sachs Forecasts S&P 500's 10-Year Return at 3%

The S&P 500's remarkable run may be coming to an end, according to Goldman Sachs analysts. In a recent note, they predicted that the index's average annual return over the next decade will shrink to just 3%, a stark contrast to the 13% average annual return of the last 10 years. This forecast is significantly lower than the consensus on Wall Street, which ranges from 4.4% to 7.4% with an average of 6%.

Goldman Sachs' pessimism stems from the market's extreme concentration, which is near its highest level in 100 years. The 10 largest stocks in the S&P 500 currently account for about 36% of the index, far higher than at any other time in the last 40 years. This concentration makes the S&P 500's performance overly reliant on the earnings growth of these large constituents.

The "Magnificent Seven" – Apple, Nvidia, Microsoft, Alphabet, Amazon, Meta Platforms, and Tesla – have more than doubled their earnings on a year-over-year basis in the first quarter of 2024. However, history shows that it's extremely difficult for companies to sustain such high levels of earnings growth. Only 11% of S&P 500 companies since 1980 have maintained double-digit sales growth for 10+ years, and a microscopic share (0.1%) has sustained 50%+ margins for a decade.


Goldman Sachs' model suggests that the equal-weight S&P 500 index could outperform the capitalization-weight index by as much as 8 percentage points a year through 2034. This is due to the difficulty of sustaining earnings growth and the market's extreme concentration. The current record outperformance for the equal-weight index is 7%, which it achieved in the decades ending in 1983 and 2010, both of which began when the market was at peak concentration, as it may be today.


Investors should be prepared for equity returns during the next decade that are towards the lower end of their typical performance distribution relative to bonds and inflation. Goldman Sachs' forecast indicates that equities will face stiff competition from other assets during the next decade. The firm estimates a 72% chance that the S&P 500 will underperform bonds and a 33% chance that it will fail to outpace inflation.

Goldman Sachs' lower returns forecast is below the consensus 6% average annualized return other market participants are expecting over the same period. The analysts warned that the estimate of many long-term investors like corporate and public pension plans may be too optimistic.

In conclusion, Goldman Sachs' forecast of a 3% average annual return for the S&P 500 over the next decade is a stark reminder of the challenges posed by extreme market concentration and the difficulty of sustaining high earnings growth. Investors should be prepared for a more competitive investment landscape and consider diversifying their portfolios to mitigate the risks associated with market concentration.