Goldman Sachs has projected a lackluster decade ahead for the S&P 500, forecasting an annualized nominal return of just 3% over the next 10 years, a stark contrast to the index’s 13% annual return over the past decade. This prediction has sparked debate among financial experts, with some supporting the forecast while others argue it may be overly pessimistic.
Historical S&P 500 Performance
The S&P 500 has demonstrated strong long-term performance, with an average annual return of approximately 10.26% since its inception in 1957 through the end of 2023. This figure includes reinvested dividends. When adjusted for inflation, the historical average annual return drops to about 6.37%.
Key performance highlights include:
- The index’s biggest up year was 46.59% in 1933, while the largest down year was -47.07% in 1931
- Over the past century, the S&P 500 has posted annual increases 70% of the time
- The compound annual growth rate since 1926, including dividends, has been approximately 9.8% (6% after inflation)
- Recent strong performance includes a 26.29% total return in 2023 and a 23.85% return in 2024 (as of October 16, 2024)
Goldman’s Bearish Outlook
Goldman Sachs’ recent forecast predicts a lackluster decade ahead for the S&P 500, projecting an annualized nominal return of just 3% over the next 10 years. This forecast is significantly lower than the index’s historical average of 11% and the 13% annualized return over the past decade.
The firm cites several factors for this pessimistic outlook:
- High market concentration: The “Magnificent Seven” stocks comprise about a third of the S&P 500’s total weight
- Elevated valuations: The S&P 500’s cyclically adjusted price-earnings (CAPE) ratio is currently at 38, in the 97th percentile since 1930
- Expected economic contractions: Goldman predicts four GDP contractions over the next decade
- Declining corporate profitability: The firm anticipates a deceleration in sales and earnings growth for the market’s largest stocks
However, it’s worth noting that other analysts and institutions have more optimistic projections, with some forecasting returns closer to historical averages. Additionally, Goldman’s past predictions have often missed the mark, highlighting the inherent difficulty in long-term market forecasting.
Goldman’s Prediction Track Record
Goldman Sachs has a mixed track record when it comes to market predictions, often missing the mark significantly. Over the past five years, their year-end forecasts for the S&P 500 have consistently been off by at least 10%, with the median prediction falling 14% short.
Some notable misses include:
- In December 2019, they projected the S&P 500 would end 2020 at 3,400, but it actually closed 10% higher at 3,756
- Their 2022 forecast of 5,100 was way off, as the index dropped 24% to 3,893
- For 2023, they predicted a close of 4,000, but the index surpassed this by 19%, ending at 4,769
This pattern of inaccuracy is not unique to Goldman Sachs. A study examining Wall Street predictions found that out of 6,627 forecasts made by 68 forecasters, only 48% were correct. These findings highlight the inherent difficulty in predicting market movements, especially over longer time horizons, and underscore the importance of taking any single forecast, including Goldman’s recent 10-year projection, with a grain of salt.
Source: Perplexity
