The Next Decade: A More Muted Stock Market?
After a decade of remarkable growth, with the S&P 500 boasting an annualized return of 13%, some analysts are cautioning that the next decade may not be as kind to investors. A recent research note from Goldman Sachs projects the S&P 500 will deliver an annualized return of just 3% over the next 10 years.
The Concentration Conundrum
The main concern driving this forecast is the high level of market concentration in the S&P 500. Currently, the 10 largest stocks in the index represent more than a third of its total value, a level of concentration not seen in nearly 100 years. History suggests that such concentration often leads to below-average returns for the following decade.
A Shift in Market Dynamics
Goldman Sachs equity strategist Ben Snider notes that this doesn’t necessarily mean it’s time to get out of stocks altogether. Rather, it’s about preparing for a potential shift in market dynamics. “We remain very confident in the long-term outlook for US economic growth,” Snider says. “However, the concern we have is that concentration is extremely high, and when we put that in our models, it points to low average returns.”
The Role of Tech Giants
The tech giants, including Nvidia, Apple, and Microsoft, have played a significant role in driving the market’s recent gains. However, their large representation in the index could also lead to lower returns if their weight were to decrease. As Snider puts it, “If their weight goes back to some kind of normal, that would weigh on the aggregate index as well.”
Alternative Perspectives
Not everyone shares Goldman’s cautious outlook. DataTrek co-founder Nicholas Colas believes the next decade will see S&P returns at least as strong as the long-run average of 10.6%. JPMorgan Asset and Wealth Management also laid out an optimistic case for stocks over the next 10 years, citing healthier macro fundamentals and corporate fundamentals.
Preparing for Lower Returns
Ultimately, the key takeaway from Goldman’s report is not to abandon stocks altogether but to prepare for potentially lower returns over the next decade. As Snider notes, “It’s not that investors are bearish on equities; in fact, they still are going to own US equities, but they’re just preparing themselves for lower returns over the next decade than the last decade.”
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