Goldman Sachs reveals long-term S&P 500 outlook

Rob Lenihan

Mon, Oct 21, 2024, 1:59 PM 4 min read

"Investors have been well-rewarded for staying invested, despite the continuous bouts of uncertainty related to geopolitical events, the U.S. political climate, shifting views of monetary policy and inconsistent economic data," said Katie Nixon, chief investment officer with Northern Trust Wealth Management.

Traders work on the floor of the New York Stock Exchange<p>Michael M&period; Santiago/Getty Images</p> — Traders work on the floor of the New York Stock Exchange
Michael M. Santiago/Getty Images

Veteran trader: 'things are getting frenetic'

"Global risk assets have performed exceptionally well, with the MSCI World Index gaining over 19% year-to-date," Nixon added. "U.S. risk-control assets — including high-quality taxable and municipal bonds — have held their own despite interest rate volatility, generating positive returns and leading to double-digit returns for balanced portfolios."

TheStreet Pro's Chris Versace told investors on Oct. 21 that roughly 112 S&P 500 basket companies will be reporting results this week, which is "up significantly compared to the last few weeks, so things are going to start to get a little frenetic."

"Remember that the pace of earnings growth for the S&P 500 in the second half of the year has really been coming down over the last several months," he said.

"However, as we saw late last week with the Atlanta Fed GDPNow model, the rolling GDP forecast for the September quarter has been far stronger than what a lot of people had thought it might have been in early August," the veteran trader said.

Versace said there have been a number of favorable data points putting the rolling GDP forecast for the September quarter at 3.4% at the end of last week, "and we've only got a few data points left for the month of September."

"I would be very surprised if we see a monster dive downward revision from here, but what this does tell us is that the economy has again been performing better than we previously thought," he said. "That could mean that those negative earnings revisions for the second-half of the year might have been a little excessive."

Versace said that he will be focusing on earnings reports from aerospace giant Lockheed Martin (LMT) and software company ServiceNow (NOW) .

Analysts at Goldman Sachs have been tracking the S&P 500's bull run and the investment firm believes the index's 10-year run of big time gains is coming to an end.

The S&P 500 Index is expected to post an annualized nominal total return of just 3% over the next 10 years, according to a report from a team of analysts headed by David Kostin.

Firm says high sales growth difficult to maintain

This compares with 13% in the last decade and a long-term average of 11%.

Goldman Sachs analysts said they have found that a model incorporating starting equity valuations, initial market concentration, starting 10-year US Treasury note yields, initial S&P 500 return on equity (ROE), and an estimate of forward economic contraction frequency best helps explain and forecast long-term equity returns.

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Today's extremely high market concentration suggests that the S&P 500 equal-weight benchmark is likely to outperform the cap-weighted aggregate index during the next decade by an annualized 200 bp-800 bp, the report said.

"Our historical analyses show that it is extremely difficult for any firm to maintain high levels of sales growth and profit margins over sustained periods of time," the report said. "The same issue plagues a highly concentrated index. Furthermore, the risk embedded in high concentration markets is not always reflected in valuation."

Goldman Sachs said that its forecast indicates that equities will face stiff competition from other assets during the next decade.

Investors should be prepared for equity returns during the next decade that are towards the lower end of their typical performance distribution relative to bonds and inflation, the firm said.

"Our 3% annualized equity return forecasts combined with a current 10-year U.S. Treasury yield of 4% and 10-year break-even inflation of 2.2% suggest the S&P 500 has roughly a 72% probability of trailing bonds and a 33% likelihood of lagging inflation through 2034," the firm said.

"Excluding concentration, the probabilities of underperforming would be 7% and 1%, respectively," Goldman Sachs added.

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