Investing Outlook for the S&P 500

Investing.com — The decade of outsized returns for the S&P 500 may be over, according to a recent report from Goldman Sachs.

Goldman 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 this forecast in the 7th percentile of historical 10-year returns since 1930.

A key factor behind this pessimistic outlook is 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 crucial 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 challenging 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 replicating the previous decade's success.

Goldman also notes that the expected return of 3% could have been 7% without accounting for the current level of market concentration, which is near its highest level in 100 years.

Furthermore, the outlook for U.S. equities faces challenges from competition with other assets. Goldman highlights that its 3% forecast combined with the current 10-year U.S. Treasury yield 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 stated 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%.