Since the bottom of the global financial crisis in July 2009, the S&P 500 has generally experienced a strong bull market. While there were challenging periods in 2018, 1Q 2020, and 2022, stock market investors have largely been well rewarded. However, Goldman Sachs warns that the good times might be coming to an end.
Goldman projects the S&P 500 to return just 3% annually over the next decade—a significant drop from the 13% average annual returns of the past 10 years and the historical 11% since 1930. Their analysis suggests a 72% probability that U.S. Treasuries will outperform the S&P, with a 33% chance the index may even trail inflation through 2034.
As the author of Buy This, Not That, a bestselling book that encourages readers to think in terms of probabilities, I found Goldman’s perspective intriguing. My key assumption is simple: if you believe there’s at least a 70% chance you’re making the right decision, you should go ahead with it. This probabilistic approach applies to investing, major life choices, and financial planning, helping to minimize risk while maximizing opportunity.
The people at Goldman Sachs aren’t stupid. If they think there’s a 72% probability of the S&P 500 returning just 3% annually over the next decade, we should probably pay attention.
Why Such An Abysmal Stock Return Forecast?
Goldman Sachs believes the S&P 500 is too heavily concentrated in major tech companies like Apple, Microsoft, Nvidia, and Meta. Historically, when there’s such a high concentration, mean reversion tends to occur, causing performance to suffer.
The S&P 500 is currently trading at around 22 times forward earnings, much higher than the long-term average of around 17 times. If the market reverts to this trend, future returns are likely to be lower.
Goldman isn’t alone in forecasting weak stock returns. Vanguard shares