The S&P 500 (SNPINDEX: ^GSPC) is synonymous with the U.S. stock market. The index has returned 13% annually over the past 10 years, outperforming most other asset classes including international stocks, bonds, precious metals and real estate. But Goldman Sachs recently shocked Wall Street with a stark warning that the S&P 500 index could return only 3% a year over the next 10 years.
This dire prediction is based on two observations. First, the index is highly concentrated, with the Magnificent Seven accounting for a third of its weight. Analysts say this is problematic because “it is extremely difficult for any company to maintain high levels of sales growth and profit margins over any sustained period of time.”
Second, the current valuation of the stock market is in the stratosphere, at least according to some metrics. The S&P 500’s cyclically adjusted price-to-earnings ratio (CAPE) is trading at 38, which ranks in the 97th percentile since 1930. That means the stock has only increased in value by 3% over the past 95 years.
To that end, Goldman Sachs expects the next decade to be disastrous for the S&P 500. But investors should take that warning with a grain of salt. Here’s why:
Wall Street doesn’t have a great track record when it comes to predicting the future performance of the stock market. Since 2020, there has been a 17 percentage point difference each year between analysts’ median year-end forecast for the S&P 500 and the index’s actual closing price, according to Goldman Sachs.
Ironically, Goldman Sachs itself has contributed to that trend by consistently making inaccurate predictions about the annual performance of the S&P 500, as detailed below.
In December 2019, Goldman Sachs predicted that the S&P 500 index would end 2020 at 3,400. However, the index ended the year 10% higher at 3,756.
In December 2020, Goldman Sachs predicted that the S&P 500 index would end 2021 at 4,300. However, the index ended the year 11% higher at 4,766.
In December 2021, Goldman Sachs predicted that the S&P 500 index would end 2022 at 5,100. However, the index ended the year down 24% at 3,893.
In December 2022, Goldman Sachs predicted that the S&P 500 index would end 2023 at 4,000. However, the index ended the year 19% higher at 4,769.
In December 2023, Goldman Sachs predicted that the S&P 500 index would end 2024 at 5,100. However, the index is now up 14% to 5,800.
Over the past five years, Goldman Sachs has underperformed the S&P 500’s year-end forecast by at least 10%, with the median estimate being 14% too low. If an analyst has a hard time predicting performance for one year, the probability of correctly predicting the entire decade is statistically slim. In fact, Warren Buffett once called stock market predictions “poison.”
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Additionally, while a high CAPE ratio has historically correlated with poor long-term returns for the S&P 500, some experts believe this metric has become less meaningful over time. The CAPE ratio, which is price divided by average inflation-adjusted earnings over the past 10 years, is based on Generally Accepted Accounting Principles (GAAP). However, the definition of GAAP earnings has changed significantly in recent years, making comparisons to past decades questionable at best.
Goldman Sachs is predicting a dark decade for the stock market, but other Wall Street analysts have different predictions for the S&P 500 index. Tom Lee of Fundstrat Global Advisors believes the S&P 500 index could reach 15,000 by 2030, implying an expected annual return of 17% from current levels. There is. 5,800 items. And Ed Yardeni and Eric Wallerstein of Yardeni Research believe the index will return 11% annually over the next 10 years.
Importantly, Yardeni and Wallerstein addressed stock market concentration concerns in a recent article. “The information technology and communications services sector now accounts for about 40% of the S&P 500, about the same as it did at the peak of the dot-com bubble, but these are fundamentally healthier companies.”
In fact, the Magnificent Seven makes up about a third of the S&P 500, but the combined profit margins of these seven companies are three times higher than the other 493 companies in the S&P 500. Additionally, The Magnificent Seven is predicted to: The remaining 493 companies are expected to report 34% earnings growth in 2024, and the remaining 493 companies are expected to report 4% earnings growth, according to JPMorgan Chase.
So what should investors do in response to Goldman’s warning? Personally, I would do nothing. Wall Street has a bad track record when it comes to single-year forecasts, let alone multi-decade forecasts. However, investors who are concerned should consider purchasing an equally weighted S&P 500 index fund. The Invesco S&P 500 Equal Weight ETF is a good option.
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JPMorgan Chase is an advertising partner of The Motley Fool’s Ascent. Trevor Jennewine has no position in any stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and JPMorgan Chase & Co. The Motley Fool has a disclosure policy.
Is the stock market in crisis? A stark warning from Goldman Sachs shocks Wall Street. Originally published by The Motley Fool
