A battle between the bulls vs the bears is brewing on Wall Street, and the argument is not about where the stock market is headed in the next year or two but for the rest of the decade and beyond. Depending on who’s right, investors could be in for another lost decade — like the one from 2000 through 2009, when the S&P 500 index ended not far from where it began. Or investors could enjoy 10 years’ worth of decent gains, if not the to-the-moon returns we’ve seen lately.
Analysts at Goldman Sachs kicked off the debate in late October when they released their latest 10-year forecast, which calls for total returns of 3% annualized for the S&P 500 over the next 10 years. The firm believes that’s the most likely return scenario, within a range of –1% and 7%. For context, the broad-market benchmark returned 13% over the past 10 years.
Goldman’s baseline, 3% forecast would rank in the seventh percentile for 10-year S&P 500 returns going back to 1930. The forecast implies a 72% probability that the broad-market index will underperform bonds and a 33% likelihood that stocks will generate a return that trails the rate of inflation.
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Goldman’s rationale for the dismal outlook hinges on the market’s current, high valuation at the starting point of the fore-cast horizon — typically, high valuations signal subpar returns are ahead. But another drag on future returns is the current concentration of market value in a small number of tech-related behemoths.
“Our forecast would be four percentage points greater if we exclude market concentration that currently ranks near the highest level in 100 years,” Goldman’s strategists write.
They’re not the only ones sounding a super-cautious note. Looking over the span of the next seven years, analysts from asset management firm GMO expect U.S. large-company stocks to deliver returns in a range from roughly 0.5% to 3%–4% annualized — an outlook that blends a few of the firm’s scenarios into one multiyear view.
“It’s not quite a lost decade, but it’s not good,” says Rick Friedman, a partner on GMO’s asset-allocation team. “You should be making 7% to 8%” considering long-term average returns, he adds.
The bulls push back on stock market expectations
Investment professionals at J.P. Morgan Asset Management acknowledge that the future certainly holds challenges for global financial assets.
“Stubbornly elevated deficits, increasing geopolitical tensions, income inequality and a rising tendency to economic nationalism all pose threats to our outlook,” they write in a recently released forecast for long- term (10- to 15-year) market returns.
In the U.S., large-capitalization stocks are particularly challenged by high valuations, which shave J.P. Morgan’s forecast for annualized returns over the period by 1.8 percentage points.
Nonetheless, J.P. Morgan’s strategists and economists still expect decent returns of 6.7% a year, on average, over their forecast period. Developed-market economies will grow at a healthy clip, they believe, aided by the transformative potential of artificial intelligence to boost productivity. That trend should support higher corporate revenue growth and profit margins, especially for large companies in the U.S., according to J.P. Morgan.
To investors of a certain age, that argument may sound vaguely familiar, harkening back to the promise of the internet back in the ’90s, before the dot-com bubble burst at the turn of the century, ushering in the lost decade.
“AI skeptics see those high valuations as one of several signs of a tech bubble,” says the J.P. Morgan report. “But we believe today’s tech narrative is very different from the dot-com bubble of the late 1990s.”
For one, AI stocks have delivered significant earnings growth to go along with those meteoric stock-price gains. And while many of the 1990s highfliers were low-quality, speculative names, today’s tech winners are marked by more-diversified revenue streams, strong balance sheets and other quality markers.
Are we in for a roaring ’20s scenario?
Strategist Ed Yardeni, at Yardeni Research, believes that a long-term forecast of 7% returns “might not be optimistic enough.” Instead, he sees a “roaring 2020s” scenario, with the economy growing at a year-over-year average of 3.0% and inflation moderating to 2.0% — a setup for returns more on the order of 11%.
“A looming lost decade for U.S. stocks is unlikely if earnings and dividends continue to grow at solid paces, boosted by higher profit margins thanks to better technology-led productivity growth,” he says. “The Roaring 2020s might lead to the Roaring 2030s.”
Yardeni sees the S&P 500 hitting the 10,000 milestone by the end of 2029, implying a cumulative 66% return from its 6032 close at the end of November, or 10.6% annualized.
But what if the pessimists are right? What if we’re due for a long span during which the broad market simply treads water? The key then will be to remember that the market is not a monolith and that there likely will be plenty of opportunities for decent-to-good returns in pockets of the market that aren’t reflected in the broad, large-company indexes.
It’s worth remembering that as the S&P 500 languished in the early aughts, for example, U.S. small-company stocks returned an annualized 6.5%, emerging markets returned an annualized 11%, and gold soared 14% a year, on average.
The winners may not be the same this time around, although a number of strategists are currently bullish on small stocks, emerging markets (depending on fiscal policies in China) and gold. Friedman, the asset-allocation expert at GMO, thinks investors will gain by investing in bargain-priced stocks overseas, where returns could reach the mid-teen percentages — more so in developed markets than emerging markets. He’s particularly bullish on small-company, value-priced stocks in Japan. In the U.S., deep-value stocks — the cheapest 20% — are “attractive and ownable,” Friedman says.
Regardless of whether we face another lost decade, it’s a good idea to maintain a well-diversified portfolio. You may tilt tactically one way or another depending on market conditions, but you should explore both U.S. and international assets, stocks of all sizes, investing styles that touch on value-oriented as well as growth-focused themes — and perhaps add an equal-weighted index fund to guard against undue concentration in the most-popular names of the day.
If you rebalance your portfolio periodically, you’ll be able to take advantage of peaks and valleys that you’ll inevitably encounter along the way, even if the market’s path, measured end-to-end over a period of time, turns out to be flat.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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