Goldman Sees S&P Returning 3% Over 10 Next Years

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Bloomberg Oct 24 11:24 · 27.8k Views

Goldman Sachs Chief US Equity Strategist David Kostin says the S&P 500 Index is expected to post an annualized nominal total return of just 3% over the next 10 years.

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00:00 When you think about this call very controversial, David.
00:03 And so I am very curious about kind of what the caveat is here.
00:07 Is there kind of any upside that could be squeezed out of the equity market that is
00:12 outside of this base case?
00:15 So let's talk about the base case for the next year and then we'll look at the base case for the following
00:20 nine years for full year, decade of of performance.
00:23 So the next year we're looking at the S&P 500 rising around 8%,
00:28 nine percent total return to an index level of around
00:32 6300.
00:33 And the thought process behind that is the US
00:35 economy is growing,
00:37 inflation is coming down, the Fed is cutting rates.
00:40 Earnings are growing 11%
00:42 in calendar 2025 and another 7% in calendar 2026.
00:47 And that sets up with a valuation today of around 22 times earnings, slight compression in the multiple that is the building blocks to a
00:54 return in the next 12 months of roughly 9%.
00:58 So what we focused on in this report
01:01 was what's the
01:02 probable
01:03 total return that an investor should anticipate
01:07 for the cap weighted S&P 500 index
01:11 and the conclusion was a range of somewhere between -1% and +7%.
01:18 Midpoint of that is around 3%.
01:21 What is the driving force behind that
01:24 thought process and that analytics?
01:26 Well, there are two issues.
01:28 The 1st is valuation.
01:29 We know when the market trades at a high multiple, a high valuation
01:33 that the
01:34 next ten years is typically low
01:37 relative to an environment where say the multiple was low at the beginning.
01:41 You tend to get a pretty strong return in the subsequent
01:45 as a substantive decade.
01:46 So we're sitting here with a cyclically adjusted PE multiple that's different from a forward one year multiple.
01:51 They
01:52 they based on the cyclical
01:53 adjusted earnings for the last decade
01:55 of 38 times,
01:57 that's the 97th percentile versus say the last 100 years.
02:01 So it's a very, very start, expensive starting point.
02:04 And what's new about the analysis
02:06 is that we also include a variable for concentration.
02:11 We're in one of the most, the highest concentration markets in 100 years.
02:16 Top ten stocks, for example, comprise around 36% of the index.
02:21 It's an extremely narrow concentration.
02:23 And historically, when you have a high concentration market, you have a relatively muted return in the subsequent 10 years.
02:30 Now, valuation and concentration are two different variables.
02:34 They're not correlated.
02:35 And so there's two different influences as to why we get a lower
02:40 relatively modest return.
02:41 Now, what are the implications for a portfolio manager, Matt?
02:44 The way you want to think about this is equal weighted.
02:47 The equal weighted return is likely to be probably 500 basis points greater.
02:52 So instead of 3% from an aggregate index,
02:54 something like 8% for the typical equal weighted index.
02:57 And so that's the conclusion of the report.
03:00 Well, but the,
03:01 the concentration is in
03:04 I think very many
03:06 global champions, right.
03:08 I mean, you have companies that dominate their spaces globally,
03:14 plus we've got a few that are
03:16 likely to come on board soon.
03:19 SpaceX,
03:20 for example, open AI
03:22 may go public in the next decade.
03:25 And if I look, David, over the last decade, I actually stole this chart from Data Trek, as I've pointed out before.
03:30 But
03:30 the only time that we've had
03:33 3% returns has been when we've had
03:37 catastrophic events, the Great Depression, the oil shock, the financial crisis.
03:43 Do you expect something like that to come again over the next decade?
03:48 No, we're anticipating is a broadening of the market.
03:51 The relative performance of the typical stock versus the aggregate index
03:55 we're focusing on is a strategy for how to
03:59 perform well.
03:59 We deal with some of our largest institutional clients, sovereign wealth funds, pension funds, endowments, insurance companies, family offices.
04:08 When they think about a 10 year horizon, they think about asset allocation, where are the risks
04:13 and the idea of a very concentrated market
04:16 is what tends to be a risk that gets introduced.
04:19 And that is the
04:20 emphasis of this report.
04:21 And that's the the the thought process, that's the analytics behind it.
04:25 In the model that we built, we look at rates, we look at the economic environment, we look at the profitability in the Roe of companies.
04:31 And so
04:32 all of these variables at the index level relative to the typical stock, that's how we get to a conclusion that it's a
04:38 better strategy, a better return strategy from our perspective
04:43 with a equal weighted strategy.
04:44 Well, David, I want to talk about the cross asset nature of this call too, because you say that it's likely that bonds are going to outperform in this environment.
04:51 But reading through this call, I mean, if you're not calling for a recession here, I assume the Fed doesn't cut rates back to 0.
04:58 Wouldn't this be a call for?
05:00 For cash, aren't cash yields going to say
05:02 relatively high and you don't have any credit or duration risk there?
05:06 Well, I mean there's other strategies you could look at private credit, you could look at private equity as a potential
05:12 way of diversifying a portfolio
05:15 relative to right now
05:16 the idea of treasuries
05:18 tenure treasuries yielding 4.2%.
05:20 So if you were to start today and look out with our, you know, centerpiece of our or the central
05:25 case of our
05:26 forecast, something like 3%.
05:28 But if you look at the distribution, look, the idea of being at the high end, there are a lot of reasons why you could be at the higher end of our range, closer to
05:36 7%.
05:37 Matt identified a couple of those.
05:39 You know, you typically get around
05:41 3 1/2 percent of the constituents in the S&P 500 turnover every year.
05:46 So we lookout
05:47 for a decade.
05:48 You're probably looking at a third of the index is going to be new stocks that don't exist today in the index.
05:53 So there's certainly a lot of variables that could happen.
05:56 The economy could be growing more rapidly, more slowly than you know then a baseline forecast.
06:01 Those are those are the issues.
06:03 AI in terms of artificial intelligence could raise productivity.
06:06 I mean, lots of reasons why it could be better than our base case scenario,
06:09 which is why we have a range
06:11 to the to
06:12 the upside of the down.
06:13 You know, one thing that struck me in this note as well as a one third chance that you have the S&P 500 lagging inflation through 2034.
06:21 What's the role of inflation here and, and what is the risk
06:24 that it could be higher?
06:26 What if the neutral rate is higher?
06:27 What kind of impact would that have on equity market returns?
06:31 Well, do you think about inflation right now the, the
06:33 TIPS
06:34 breakevens are around 2.2% for example.
06:36 And so based on a scenario where you have
06:40 a return that could be negative 1% annualized versus +7% kind of there's a distribution around that relatively normal
06:47 type distribution.
06:48 The, you
06:49 know, part tail of the of the distribution would give you
06:52 a, a prospect of a return that's less than inflation.
06:54 That's not the base case, but it certainly is a, is a, is a scenario,
06:58 you know, we deal with portfolio managers.
06:59 They want to think about what are the risks that are introduced into their portfolio.
07:03 And the argument behind a broadening of the market is an important construct.
07:07 So one of the arguments on why midcap stocks are likely to do better than
07:12 in the rest of the market in the coming year.
07:14 They have the best torque to the idea of the Fed cutting rates.
07:16 They got 25% of their balance sheet is floating rate.
07:19 So you have the Fed cut rates, they have less interest expense, they have higher
07:23 earnings, positive runnings revisions, drives equity prices.
07:26 And so those are you know, tactical issues, opportunities in the market.
07:30 So we think about tactics, we think about strategy longer term and that's the
07:34 purpose of writing the
07:36 report and and response to questions from clients about how should we think about the
07:40 perspective 10 year forward returns in the in the equities,
07:43 right, David, we don't have a lot of time left.
07:45 I know I have a question.
07:46 I know that Matt has a question as well.
07:48 So let me ask you this quickly.
07:49 I want to get existential about the business that you're in because you think back to January and actually Wall Street strategist on average we're expecting the S&P 500 to rise about 2% this year
08:00 it's up 23%.
08:01 And I'll flip the question to you, is it getting harder to model to forecast where the index is going to go?
08:09 Well, it is challenging because a third of the index is comprised right now of about 10 stocks.
08:15 That's not just tech stocks.
08:17 You have some healthcare stocks,
08:18 Eli Lilly, you've got Berkshire Hathaway's in the top ten companies, for example, Depends on the day we're we're looking at it could be Visa,
08:25 Broadcom, different, different constituents along with the big tech companies that we're all familiar with.
08:30 And so it's challenging to look at that market.
08:33 That's that component.
08:34 And you can look at the rest of the the balance of the market.
08:37 So you think about those big stocks they trade at 31 times earnings.
08:40 That's a 2.7% or so
08:42 earnings yield.
08:43 It's a negative risk premia versus 10 year Treasury.
08:46 So that's a concern about valuation.
08:49 And then you have the concentration item that I overlaid rest of the market has a positive risk premium versus bonds.
08:54 And so that's
08:55 one of the attractive components of why there's a broadening of the market and why we anticipate that to persist.
09:01 David, I have a,
09:02 an election night question for you.
09:04 When you,
09:05 you know,
09:06 get home, put on your slippers, grab a Scotch and your pipe
09:10 or whatever, and you, you settle down in that lazy boy, right click on Bloomberg TV.
09:15 What are the,
09:18 what are the indexes or the assets or
09:21 what are you going to be watching
09:23 on election night as we
09:25 hopefully get a clearer picture of who's going to occupy the White House in the next 4 years?
09:31 Well, the
09:32 election is obviously quite close in terms of the polls and things like that.
09:36 So I think there's a couple things that we look at
09:39 first.
09:40 Is there a
09:41 split Congress versus the presidency
09:44 that would suggest there's certain executive
09:47 actions that can be taken, whether that's respect to tariffs, whether it's
09:51 respect to certain regulation aspects
09:53 that the
09:54 that the presidency he or she could could could implement.
09:58 Whereas if there's a sweep on the.
10:00 Democrat or the Republican side, either direction,
10:03 there are potential legislative aspects.
10:05 So Matt, that's sort of the first
10:07 question I want to think about.
10:08 The second is we think about, well, what are the impacts of potential tariffs?
10:12 What would they be?
10:13 Well,
10:14 U.S.
10:14 companies that are selling domestically
10:17 are likely to outperform
10:19 U.S.
10:19 companies that export more to the rest of the world because there could be retaliatory tariffs.
10:23 So that's one strategy that we might
10:26 might look at.
10:27 We might look at companies that have
10:30 that sort of a
10:31 executive authority that you might want to think about.
10:33 And then we would talk about that with with portfolio managers and there's
10:37 baskets that we have, we trade on Bloomberg with clients
10:40 based on those two characteristics.

Goldman Sees S&P Returning 3% Over 10 Next Years

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