Investing.com — The decade of outsized returns for the may be over, Goldman Sachs said in a recent report.
More concretely, the bank forecasts that the index will deliver a nominal annualized return of just 3% over the next decade, significantly lower than the 13% annualized return seen in the past 10 years. Adjusted for inflation, the real return is expected to be around 1%, ranking the forecast in the 7th percentile of historical 10-year returns since 1930.
One key factor behind this pessimistic outlook is the high market concentration, with the top 10 stocks now accounting for more than a third of the S&P 500’s total market capitalization.
“Today’s extremely high market concentration suggests that the S&P 500 equal-weight benchmark (SPW) is likely to outperform the cap-weighted aggregate index (SPX) during the next decade by an annualized 200 bp-800 bp,” Goldman’s report states.
Market concentration plays a key role in long-term return forecasts. Goldman argues that the concentration of gains in a few mega-cap companies, particularly in the tech sector, raises concerns about sustained growth.
Historically, it has been difficult for any firm to maintain high levels of sales growth and profit margins over extended periods, and the same applies to a concentrated index. This makes it unlikely that the S&P 500 will continue to replicate the success of the previous decade.
Goldman also notes that the expected return of 3% could have been 7% if the current level of market concentration were excluded from its model. According to the report, this concentration is currently near the highest level in 100 years.
The outlook for U.S. equities is further challenged by competition from other assets. Goldman highlights that the combination of its 3% forecast and the current of 4% implies a 72% probability that equities will underperform bonds over the next decade.
“Excluding concentration, the probabilities of underperforming would be 7% and 1%, respectively,” Goldman said in the report.
The bank also assigns a 33% likelihood that the S&P 500 will generate a return below inflation through 2034.
Goldman’s 3% annualized 10-year return forecast for the benchmark index is notably below the consensus average of 6%.
