On Friday, Goldman Sachs (GS) released a research note suggesting that the S&P 500 is likely to deliver an annualized return of just 3% over the next 10 years. The report pointed to the market concentration issue, with more than a third of the index being invested in just 10 stocks, a pattern that has historically led to below-average returns (read: Is S&P 500 Expected to Underperform? ETFs in Focus).

High Market Concentration Risks

Ben Snider, an equity strategist at Goldman Sachs, emphasized that while the projection might seem bearish, it’s not a signal to exit stocks, as quoted on Yahoo Finance. He explained that the high concentration of a few major stocks, such as NVIDIA NVDA, Apple AAPL, and Microsoft MSFT, is a key factor driving the lower return forecast.

When a small number of stocks dominate the market cap, history suggests that their ensuing correction could lead to underperformance in the broader index. Snider noted that the top 10 largest stocks in the S&P 500 now make up for more than one-third of the index, nearing the highest concentration levels in 100 years.

No Immediate Catalyst for Decline

Goldman Sachs does not foresee an immediate catalyst triggering a downturn but believes that the concentration will eventually unwind. The firm projects that the S&P 500 will touch 6,300 over the next 12 months, but over a longer horizon, the high concentration will likely result in lower average returns.

Optimistic Views in Wall Street Also Present

Not everyone agrees with Goldman's cautious outlook. Nicholas Colas, co-founder of DataTrek, argued that returns as low as 3% usually only occur when a significant crisis strikes, as quoted on the above-mentioned Yahoo Finance article. He remains optimistic about US equities, believing that disruptive technologies powered by U.S. companies could continue to fuel market gains. Colas expects the next decade’s returns to match or exceed the historical average of 10.6%.

JPMorgan Asset and Wealth Management stated a more optimistic view, agreeing that while stock multiples are high, healthier macroeconomic and corporate fundamentals could lead to solid returns over the next decade.

Total Q3 earnings for the 120 S&P 500 members that have reported results through Wednesday, Oct. 23, are up +1.9% on +4.2% higher revenues, with 79.2% beating EPS estimates and 63.3% beating revenue estimates, per Earnings Trends.

Should You Buy Wide Moat ETFs?

Despite chances of lower returns, investors are not bearish on US equities. Many still plan to hold stocks but are adjusting their high expectations after a great strong decade. Many may be interested in playing quality stocks and exchange traded funds (ETFs), for example, wide moat stocks and ETFs.