Wave Goodbye To the Stock Market’s Historic Run, Goldman Sachs Says

The S&P 500 is on a record run this year, posting its strongest year-to-date performance since 1997. But, as analysts at Goldman Sachs argued in a note on Monday, all good things must come to an end. 

Goldman analysts forecast the S&P 500 will return an average of just 3% a year in the next decade, a far cry from the 13% average annual return of the last 10 years. That would rank in the bottom decile of comparable periods in the last century. It also puts the odds that stocks fail to outpace inflation at about 33%. 

Goldman’s forecast is far below the consensus on Wall Street. According to its analysis of the publicly available capital markets assumptions of 21 asset managers, other 10-year forecasts for S&P 500 performance range from a low of 4.4% to a high of 7.4%, with the average being 6%. 

Why Concentration Could Spell Trouble for the S&P 500

So why the pessimism? One of the primary causes for Goldman’s concern is the market’s extreme concentration, which by their measure is near its highest level in 100 years. Concentration of this magnitude, the analysts say, makes the performance of the S&P 500 overly reliant on the earnings growth of the index’s largest constituents. 

The 10 largest stocks in the S&P 500 currently account for about 36% of the index, far higher than at any other time in the last 40 years. These stocks have swelled in size in large part because of their exceptional earnings growth over the last two years. The Magnificent Seven—Apple (AAPL), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG; GOOGL), Amazon (AMZN), Meta Platforms (META), and Tesla (TSLA)—more than doubled their earnings on a year-over-year basis in the first quarter of 2024.

History shows, however, that it’s extremely difficult to sustain earnings growth at that clip. Just 11% of S&P 500 companies since 1980 have maintained double-digit sales growth for 10+ years, according to a Goldman analysis. A microscopic share (0.1%) has sustained 50%+ margins for a decade.

“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 analysts write.

The Magnificent Seven’s earnings growth already has begun to decline from its meteoric pace of the last two years. The group’s profit growth is expected to decline to just over 18% in the third quarter as year-over-year comparisons become more difficult.

However, growth is expected to pick up for the “Other 493,” which are forecast to post double-digit earnings growth over the next five quarters, significantly narrowing the gap between those companies and the Mag Seven. 

What It Means for Your Portfolio

The market’s extreme concentration and the difficulty of sustaining earnings growth are two key reasons Goldman expects the equal-weight S&P 500 index to outperform the more widely tracked capitalization-weight, or aggregate, version over the next decade. 

Historically, the equal-weight index tends to outperform the aggregate index, but the last 10 years have been a different story. The aggregate index has outperformed the equal-weight by 3 percentage points a year since 2014. 

Goldman expects the pendulum to swing back in favor of the equal-weight index, which their model suggests will outperform by 8 percentage points annually through 2034, its most dramatic outperformance since at least 1980. The size of the outperformance may seem extreme, the analysts note. “However, the equity market has also rarely been as concentrated as it is now.”

The current record outperformance for the equal-weight index is 7%, which it achieved in the decades ending in 1983 and 2010. These two 10-year stretches, Goldman points out, each began when the market was at peak concentration, as it may be today.