David Kostin, Goldman Sachs, warns that the S&P 500 may have offered good returns over the last ten years, but the investment landscape through 2034 will be drastically different.
The chief of US equity strategy at the bank does not expect that the broad market index will return more than 3.0% per year over the next decade.
Comparatively, it returned an average of 13% between 2013 and 2023.
Kostin’s dovish view on the long term is based on unreasonable initial valuations, unusual concentration and unusual concentration.
The S&P 500 has risen by close to 25% since the beginning of the year, but most of that is due to the “Magnificent Seven”.
Kostin predicts that the S&P 500 will underperform bonds
Investors remain bullish on the S&P 500, as inflation is returning to its target of 2.0%, the economy remains strong, and Federal Reserve plans to cut interest rates further in December.
David Kostin says that Google and Nvidia are able to help the benchmark index rise for a limited time.
In a recent research report, he said that historical analysis showed it was extremely difficult for any company to maintain high levels in sales growth and profit margins for sustained periods of time.
In terms of returns, the S&P has historically beaten bonds by a wide margin. The chief of US equity at the bank now believes that the 10-year Treasury will underperform the S&P 500 over the next 10 years by 72%.
Crispus Nyaga, our market expert, also expects that the overbought SPX will reverse in the next few months.
Why else is Goldman Sachs dovish about the S&P 500 index?
David Kostin believes that the initial valuations of the S&P 500 will not be enough to guarantee healthy returns over the next ten year period.
Our 10-year forecast is at the lower end in the historical distribution due to the current high equity valuations.
Goldman Sachs uses the CAPE or cyclically-adjusted price/earnings to value and remains dovish, as higher initial valuations typically lead to lower future returns.
This metric is currently at the 97 th percentile.
Kostin expects that the broad market index will return a negative 1.0% annual return in the worst case scenario.
He is not alone, however, in expecting lower than average returns for the S&P over the next decade.
JPMorgan also cited the high valuations and huge fiscal spending in its recent research note, as it predicted an annual return of approximately 6.0% from the benchmark index over the next ten year period.
The investment firm also added that a persistent inflation could cause multiples to shrink.
This post S&P500 annual returns will be limited to 3% for the next decade. Goldman Sachs warns that it may be modified based on updates.
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