The stock market has been on a meteoric rise over the past decade, with the S&P 500 (^GSPC) posting an annualized return of 13%.
On Friday, Goldman Sachs (GS) published a research note predicting that the next decade won’t be so kind to investors in the benchmark index. The S&P 500 will deliver an annualized return of 3% over the next decade, Goldman predicted, noting that more than a third of the index, concentrated in just 10 stocks, has generally delivered below-average returns.
But Goldman Sachs equity strategist Ben Snider told Yahoo Finance that the headlines are not as bearish as they seem, nor is it a call to get out of the stock now.
“We remain very confident in the long-term prospects for U.S. economic growth,” Snider said in an interview Tuesday. “We remain very confident in the prospects for long-term corporate earnings growth. We feel good about the long-term prospects for the average [S&P 500] stock. The concern we have is that the concentration is extremely high… And when we put that into our models, it indicates a low average return.”
Currently, the 10 largest stocks in the S&P 500 represent more than a third of the index, pushing market concentration to near a 100-year high, Goldman said. With history as a guide, this has generally led to below-average returns for the next decade, Snider said.
This would likely happen because stocks that are part of that large concentration in the index – such as Nvidia (NVDA), Apple (AAPL) or Microsoft (MSFT) – are dropped. And just as the ‘Magnificent Seven’ tech stocks helped lead the market higher, in this scenario they would lead the market lower.
“The idea here is that you have a few stocks with an unusually large representation of the market cap,” Snider said. “And if their weight returns to some sort of normal, that would weigh on the overall index as well.”
There is no obvious shock that Goldman believes will usher in the decade of poor returns. That’s why the team expects the S&P 500 to reach 6,300 over the next twelve months. The problem for Goldman in its latest exercise is that ten years is a long time.
“The longer your investment horizon, the more uncertain any catalysts that will occur during that horizon,” Snider said. “And so just given the starting point of the concentration, history would tell us that in the next decade there will probably be a catalyst that causes this to return.”
But he did note the caveat that reducing market concentration “doesn’t have to happen within the next decade, and doesn’t necessarily have to weigh on the stock market, because the rest of the stock market could have dramatic leverage.” components.”
Some on Wall Street don’t see that recovery happening anytime soon. DataTrek co-founder Nicholas Colas wrote in a note to clients Tuesday morning that 3% annualized returns or worse “only happen when something really, really bad has happened.”
The question is how long the current exceptionalism in the market, especially among the American technology giants, can last.
“The bottom line is that we believe S&P returns over the next decade will be at least as strong as the long-term average of 10.6 percent, and possibly better,” Colas wrote after outlining how continued gains in disruptive technology led by American companies could fuel economic growth. profits.
During a roundtable with reporters on Monday, JPMorgan Asset and Wealth Management presented an optimistic case for stocks over the next decade. But when asked about Goldman’s call for an average annual return of 3% over the next decade, Monica Issar, JPMorgan Wealth Management’s global head of multi-asset and portfolio solutions, conceded that the Goldman team made a justified makes a point about the recent rise in share prices: while the outlook for shares is still relatively strong.
“We are on a higher starting point,” Issar said. “So we don’t want to avoid that conversation. We want to make sure people understand that we assume [stock] multiple contractions.
“We’re just saying that this multiple contraction will be offset by healthier macro fundamentals over the next decade, with healthier business fundamentals over the next decade, and that this fundamental is a more solid time for investors to allocate capital.”
Issaar’s point goes to the heart of what Snider says long-term investors told him after reading the report.
“It’s not that [investors are] bearish on stocks,” Snider said. “In fact, they will still own U.S. stocks, but they are just setting themselves up for lower returns in the next decade than they did in the last decade.”
Snider added of his team’s view: “We are still very optimistic about the U.S. stock market.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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