The investment bank predicted that the S&P 500 index would generate a nominal annualized total return of 3% through 2034, after posting an annualized total return of 13% over the previous decade.
Goldman Sachs’ reasoning is that the U.S. market is extremely concentrated – close to its highest level of concentration in 100 years – a characteristic that the investment bank says has historically been associated with greater realized volatility over time.
“The current extremely high level of market concentration is one of the main drags on our return forecasts,” the analysts said. “If our model excluded this variable, our baseline return forecast would be about 4 percentage points higher (7 percent instead of 3 percent). »
Additionally, the investment bank cited the rise of “superstar” companies benefiting from economies of scale, such as today’s large-cap technology stocks, which led the S&P 500 to trade at a considerably high P/E multiple.
“I agree there’s definitely a risk,” Oliver said. “You can’t ignore that a lot of the market is concentrated in a handful of stocks,” he said, although he said concerns about U.S. market valuations are not new.
“We have been talking about high concentration in the U.S. stock market for a long time.”
Oliver says investors need to be alert to the possibility that something could knock the U.S. market off its perch. Again, he says, this is nothing new.
“They are [Goldman Sachs] simply saying, “Well, over the next decade the potential of the U.S. stock market was much less than it has been over the last decade.” » That’s what they say, and I tend to agree with that.
“And if investors actively manage their portfolios and think over a 10-year horizon, there is reason to reduce exposure to the United States, as it seems difficult to see the Mercenary Seven continuing to do as well as they have. ‘have done.”
Ultimately, Oliver agrees that returns will be much lower than they have been, but, in his view, Goldman Sachs’ forecasts are nothing more than “useful information.” He warned that it would be “difficult” to anticipate a possible economic slowdown.
“I think this gives us some useful information on a 10-year outlook – expect lower yields in the US.
“Consider greater exposure to other markets, including our market. But it will be difficult to predict this, and one cannot rule out the possibility that at some point the United States will experience a fairly significant correction,” Oliver said.
In its analysis, Goldman Sachs acknowledged that its 10-year annualized return forecast of 3% is well below the consensus average of 6%.
The investment bank also highlighted the “high uncertainty” inherent in forecasting the future and highlighted several risks to its forecast. Among these risks is the possibility that short- and long-term rates could fall again to historic lows, which would create upside valuation risk.
Additionally, Goldman Sachs said that if faster-growing, more profitable companies entered and remained in the index over the next decade, “returns would be boosted as the index would benefit from an improvement in its overall profile.” growth and profitability.
Other risks to the forecast include a sharp increase in labor productivity over the forecast period, which in turn would boost earnings and total returns, as well as a new generation of investors with new risk tolerance profiles.
Don’t panic for the instos
Reflecting on the potential impact of the S&P 500’s lackluster performance over the next decade on Australia, Oliver said local institutional investors would refrain from acting “precipitously”.
Indeed, while Oliver expects institutions such as pension funds to take these and many other forecasts into account, including their own projections, he does not expect them to act hastily.
“Throughout my career, I have repeatedly seen people say these kinds of things, and the market continues to work. And of course, over time, that suddenly turns out to be correct, but with the adjustment comes a sharp decline in the market,” Oliver said.
“Just trying to time it is going to be difficult. This does not mean that the average annual return over the next 10 years will be 3 percent. It’s extremely unlikely that you’ll get something like this. What they’re saying is that the average over the next 10 years will be about 3 percent.
Oliver added that if the U.S. tech space continues to evolve favorably, market gains could continue for some time to come.
“This is why it is dangerous to react hastily to such forecasts.”
