Goldman Sachs warns: The 10-year high growth period of US stocks will end

Goldman Sachs strategists say that the U.S. stock market is unlikely to maintain its above-average performance of the past decade as investors are starting to turn to other assets, including bonds, in search of better returns.

According to analysts, including David Kostin, the S&P 500 Index is expected to have an average nominal return of only 3% over the next decade. In contrast, the index had an average return of 13% over the past decade, with a long-term average return of 11%.

They also believe that the probability of the S&P 500 Index underperforming government bonds is about 72%, and the probability of underperforming inflation by 2034 is 33%.

In their report on October 18th, the team wrote, "Investors should prepare for lower stock returns over the next decade."

Since the global financial crisis, the U.S. stock market has been on an upward trend. According to Bloomberg data, the S&P 500 Index outperformed other regions of the world in eight out of the past ten years.

However, this year's 23% rebound has been mainly concentrated in the largest tech stocks in the U.S. Goldman Sachs strategists say they expect the rebound to be more widespread, and in the next decade, equal-weighted indices like the S&P 500 will outperform the market-cap-weighted S&P 500 Index.

Even if the rebound continues to be concentrated, the return of the S&P 500 Index will be below average, at around 7%.

Undoubtedly, the concentration of the U.S. stock market (and consequently the global stock market) is exceptionally high. However, investors should question whether this concentration is important or whether they should avoid stocks because of it. Kostin found that the concentration is at the 99th percentile historically.

Kostin states that compared to markets with lower concentration and higher diversification, index performance in highly concentrated environments will reflect a less diversified set of risks and may have greater actual volatility.

The following chart shows the proportion of the top 10 stocks in the S&P 500 Index since 1980:

Another chart by Kostin reflects the proportion of the largest stock compared to companies in the 75th percentile by size in the index since 1925. Peaks in the chart coincide with significant moments, whether it's buying (like in 1932 and 2009) or selling (like in 1973 and 2000). Generally, extreme concentration occurs during economic downturns, which is not the case now, or during times of extreme market excitement, such as the Nifty Fifty in 1973 and the internet bubble in 2000:

Kostin demonstrates how concentration affects valuation. If the top 10 stocks are excluded, the S&P 500 index outperforms the 10-year Treasury bond; while the top 10 stocks themselves have lower returns, which should be a strong sell signal.

Former Chief Market Commentator of the Financial Times and Bloomberg columnist John Authers pointed out that it makes sense to view extreme concentration as a sign of greater vulnerability in the U.S. stock market. Typically, a strategy of only buying the largest stocks is a losing strategy because these stocks have only downside potential, and their competitive position will gradually be eroded.

Kostin noted that even without considering concentration, the return on U.S. stocks in the next decade will only increase from the 7th percentile since 1930 to the 22nd percentile. This means that even if we ignore the impact of concentration, it is difficult to be optimistic about stocks in the next decade.

However, it appears that the U.S. stock market will continue to rise for now, so caution is advised