Goldman Sachs predicts that the annualized return on US stocks over the next ten years will drop to 3%, sparking doubts among Wall Street insiders. Analysts at Morgan Stanley forecast an annualized return of 6.7%, believing that a healthy macroeconomy and corporate fundamentals will support investments. Yardeni, on the other hand, expects a near 11% annual return, citing productivity growth as a driver for stock market prosperity
According to the financial news app Zhitong Finance, Goldman Sachs stated last week that as investors turn to other assets, including bonds, in search of better returns, it is unlikely that US stocks will maintain their performance above the average level of the past decade. Analysts at Goldman Sachs, such as David Kostin, predict that the annualized nominal total return rate of the S&P 500 index in the next ten years will only be slightly above 3%, compared to 13% in the past decade and an average of 11% in the long term.
However, Goldman Sachs' prediction has been met with skepticism from many Wall Street professionals. Analysts at Morgan Stanley, for example, forecast that despite possible declines in price-to-earnings ratios, US large-cap stocks will still be the cornerstone of investors' portfolios, with an expected annualized return rate of 6.7% over the next 10-15 years. The global head of wealth management at Morgan Stanley stated that despite potential decreases in price-to-earnings ratios, healthier macroeconomic and corporate fundamentals will provide investors with more stable capital allocation opportunities. The optimism within Morgan Stanley's team is partly driven by their expectations of income growth and margin improvement from artificial intelligence, especially for large companies investing heavily in this technology.
Expectations for increased productivity, strong profit margins, and healthy earnings growth have been hot topics recently. Ed Yardeni, founder of Yardeni Research and a veteran of Wall Street, also predicts that these trends will drive US stocks higher in the coming years. Yardeni has been advocating for a stock market boom similar to the Roaring Twenties for the past two years, citing sustained productivity growth. He points out that with the US economy growing at a rate of 3% per year and inflation moderating to around 2%, the average annual return rate for the stock market over the next decade should be close to 11%.
Yardeni stated, "It's hard to imagine that the total return rate of the S&P 500 index in the future will be only 3%, just looking at the compounding of reinvested dividends, the return is much higher than that." If current trends continue, he envisions a scenario where the stock market prosperity of the Roaring Twenties will extend into the next decade, challenging Goldman Sachs' conservative view. He believes that if returns and dividends continue to grow steadily and profit margins increase due to technology-led productivity growth, the possibility of an upcoming lost decade for the US stock market is unlikely.
Nicholas Colas, co-founder of Datatrek Research, is optimistic about the current state and future trends of the US stock market. He stated, "The next decade for the S&P 500 index will be filled with world-class, profitable companies, with more companies waiting to go public." "Valuations reflect this, but they cannot predict what the future holds." He added, "Over the next decade, the return rate of the S&P 500 index will at least reach the long-term average level of 10.6%, and possibly even higher."
Colas pointed out that cases where the historical return rate of the S&P 500 index was below 3% "always have very specific catalysts to explain these below-average returns," such as the Great Depression, the oil crisis of the 1970s and its subsequent effects, and the global financial crisis, all of which are related to these low ten-year return rates. He stated, "History shows that only when very, very bad things happen do return rates reach 3% or lower." "Although we rely on media reports on Goldman Sachs research, we have not read any overview of the crisis envisioned by their researchers. Without it, their conclusions are difficult to reconcile with nearly a century of historical data."
Barry Ritholtz, co-founder of Ritholtz Wealth Management, said, "It is unlikely to predict what economic disasters will happen in the next 10 years. It's hard to imagine a decade without some kind of economic disaster. But this is a completely different discussion from the 3% annual return for a decade."
In fact, accurately predicting what will happen in the next ten years is very difficult, and Goldman Sachs also emphasizes this in its report. At the same time, as Ed Yardeni and Nicholas Colas have pointed out, there are good reasons for predicting both low and high returns.
U.S. Macroeconomy
Several macroeconomic data points last week indicated that the U.S. economy still has resilience, including stable credit card spending data, a decrease in initial jobless claims, and improved consumer sentiment. However, existing home sales declined, mortgage rates rose slightly, and offices remain relatively empty. In addition, the CEO Confidence Index for the fourth quarter of 2024 from the Business Roundtable showed that optimism is cooling off. The organization's chief economist, Dana Peterson, said, "CEOs' optimism continued to fade in the fourth quarter as leaders of large companies became less confident about the prospects for their industries. Views on the overall economy—both now and in the next six months—have changed little compared to the third quarter. However, CEOs' assessments of the current state of their industries have declined."
There are some noteworthy data points as well. U.S. business investment activity is on the rise, with September's non-defense capital goods orders excluding aircraft (a proxy for core capital expenditures or business investment) increasing by 0.5% to a record $74.05 billion. Core capital goods orders are a leading indicator, signaling future economic activity. While the growth rate has stabilized, they will continue to show strong economic momentum in the coming months. Most states in the U.S. are still growing; recent GDP growth expectations remain positive, with the Atlanta Federal Reserve's GDPNow model showing a 3.3% real GDP growth rate for the third quarter.
Taken together, it is evident that the U.S. economy still has resilience, supported by very healthy consumers and corporate balance sheets. With inflation nearly solved, the Fed has shifted its focus to supporting the labor market.
Despite the market being in a strange period where hard economic data has decoupled from soft sentiment data—consumer and business confidence are relatively poor despite continued growth in consumer and business activities at record levels. However, from an investor's perspective, it is important that hard economic data continues to remain robust.
Analysts expect that the performance of the U.S. stock market may outpace the U.S. economy, largely due to positive operating leverage. Since the pandemic, companies have actively adjusted their cost structures, leading to strategic layoffs and investments in new equipment, including AI-driven hardware. These actions have brought about positive operating leverage, meaning that moderate sales growth is translating into strong profit growth even in an economic slowdown." Of course, there are still some risks, such as the uncertainty of US politics, geopolitical turmoil, energy price fluctuations, and so on. But for now, there is no reason to believe that, as time goes on, the economy and the market will face insurmountable challenges. Long-term games are still unbeatable, and long-term investors can expect this momentum to continue