Is the S&P 500 Really Doomed to a ‘Lost Decade’? Goldman Sachs thinks so, but will it eventuate?

The term ‘Lost Decade’ gets thrown about a lot, but most recently to the next decade to the S&P 500. Goldman Sachs released a report predicting the next 10 years would not be so rosy as the 10 that preceded it. Let’s take a deeper dive into why Goldman believes this, and whether or not this is a reasonable forecast.

Goldman thinks a Lost Decade is coming

The S&P 500 has performed spectacularly with a 23% gain in 12 months, 93% in 5 years and 200% over the last 10 years. Since March 2009, over 600%. But don’t expect to see this again any time soon.

Goldman Sachs released a report predicting a 3% annualised return for the S&P 500 index over the next decade. Not exactly negative returns, true. But in real terms, it is only 1% and it ranks in the seventh percentile of ten-year returns since 1930. If replicated, it would be a mere fraction of the 13% annualised return in the last decade and 11% of the average decade return.

You might say, OK, but this is just one forecast. Indeed it is. But the last time David Kostin (Goldman’s US equity strategist) made such a model, in 2012, he predicted a 14% annualised return, which turned out to be nearly right.

The report also assigned a 33% likelihood that the S&P 500 would generate a return below inflation through 2034.

Why is a Lost Decade is coming

Because stocks are overvalued, in its view. The current Cyclically-Adjusted Price-to-Earnings Raito (CAPE) is 40x, nearly double the average 22x multiple since 1940. The CAPE is higher than the 1929 Crash and the top of the dot-com bubble in the early 2000s – both events where CAPE crashed, as it did after the pandemic, only to recover in 2023 due to hype over AI and ChatGPT.

Another factor is the high market concentration. Those who shun the ASX often point to how the banks and miners make up a high proportion of the index, but global markets are more diversified. Things are getting concentrated in the US, with the top 10 stocks now accounting for more than a third of the S&P 500’s total market capitalisation. Furthermore, concentration is at the 99th percentile in history.

These top stocks are there for a reason, because they are either monopolists or oligipolists with high sales and typically high or steady margins. No company can maintain such a rate forever, without significant innovation at least. The report noted the concentration is near the highest level in 100 years.

Goldman also reckons bonds will perform better. It argues the 4% 10-year Treasury yield implies a 72% probability that equities will underperform bonds over the next decade. Finally it assigned a 33% likelihood that the S&P 500 would generate a return below inflation through to 2034.

Why should local investors care unless they invest in international stocks?

Well, you may actually be invested without knowing about it. Even if you are just in a ‘balanced’ option it may have a mix of assets including global shares. Global shares are worth 27% of our total super assets according to the Association of Superannuation Funds of Australia.

What will this mean?

If this is correct, equities may not be the best space to invest in – or at least not the top 10 S&P 500 stocks right now. But this does not mean that some individual stocks will benefit. Some stocks may defy the market and achieve stellar results. The challenge just is finding such stocks, because they may be harder to find, but not impossible. Investors will need to have to more patient, and be accustomed to doing further due diligence than they will have been it the past.

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