S&P 500 Will Only Gain 3% Annually Through 2034

It was fun while it lasted, and I hope you profited from the massive, unprecedented rally in large-cap stocks. According to a Goldman Sachs strategist, the S&P 500 index will only return 3% per year to investors, on average, through the next decade.

Goldman Sachs Chief U.S. Equity Strategist David Kostin disseminated this warning in a note on Thursday, during a time when the S&P 500 hovered near its all-time high. Kostin’s note also contradicted the euphoric market sentiment as investors cheered Tesla’s third-quarter results.

Kostin’s cautionary note doesn’t appear to be related to short-term concerns, such as tensions in the Middle East or the presidential election. Rather, it’s a function of mean reversion as the S&P 500 has evidently gotten ahead of itself.

I’ve heard that over the long term, the S&P 500 has historically yielded around 10% per year. However, the index has delivered outsized 13% annual average returns during the past 10 years.

Economists are fully aware that this is unsustainable, and the general market consensus calls for 6% average annual gains in the S&P 500 through the next decade. Yet, even if everybody understands that outsized returns should be followed by a period of underperformance, Kostin’s 3% prediction stands out as unusually bearish.

Granted, this doesn’t mean the index will return exactly 3% each and every year through 2034. Kostin’s team clarified that Goldman Sachs’ forecast range includes a probable 7% gain at the high end as well as a 1% decline at the low end.

Courtesy: @KobeissiLetter

A problem with bearish “slow growth forever” calls is that fighting the Fed is a tough battle for investors to win. For instance, in anticipation of the Federal Reserve continuing to slash interest rates, the S&P 500 has booked a massive gain over the past 12 months.

It’s certainly tempting to assume that big gains beget more years of big gains. Feelings of complacency and euphoria are infectious, but past performance doesn’t guarantee future returns.

In any case, the Goldman Sachs strategies maintain a 95% confidence band around the 3% projection. To put it another way, Kostin is highly confident in his bearish call.

Meanwhile, government bond yields are set to decline as the Federal Reserve prepares to lower interest rates, probably two more times this year and then multiple times in 2025. Thus, the old-fashioned portfolio mix of 60% large-cap stocks and 40% bonds won’t offer retirees much in the way of livable income.

As the old saying goes, don’t kill the messenger of bad news. I might not stand by the precise call for 3% yearly returns, but after a decade of Fed-fueled 13% annualized gains, some normalization is definitely in order.

Courtesy: ZeroHedge

This stands in stark contrast to gold, which is long overdue for a rally and is really just starting to break out. After years of dormancy, gold recently reached its highest inflation-adjusted level since January of 1980.

Please don’t misunderstand this as a call to short-sell or bet against the S&P 500. The Federal Reserve is pulling out its bazooka now, so another short-term price spike shouldn’t be too surprising.

On the other hand, the market already knew that the Fed would pull out the liquidity bazooka. That’s why the S&P 500 is near all-time highs despite evident signs of weakness in the economy.

Indeed, the Fed’s liquidity injections have made the past decade of oversized returns in large-cap stocks possible. It’s a bazooka that has worked every time – but it’s also been a primary cause of inflation.

Instead of trying to bet against the S&P 500, investors can choose to diversify their portfolios beyond large-cap stocks. Along with gold and silver, there are high-potential small-cap and mid-cap stocks to consider.

It’s a good thing that there are alternatives to the 60%-40% mix of large-cap stocks and bonds. If Kostin is right, staying the course with the S&P 500 could turn out to be a flat-tire strategy that never gets rolling.