Recently, analysts at Goldman Sachs predicted that the S&P 500 will grow by only 3% per year over the next decade, which is in stark contrast with the actual returns of 13% within the last decade. This forecast puts the next decade's performance at the bottom of historical returns over the past hundred years.
One reason for this worrying perspective is that the index contains many stocks from the relevant industries. As of now, those ten companies make up roughly 36% of the value of the index, which represents considerably more focus than what was observed 40 years ago and even less than five years back. This extreme focus has amplified the index's vulnerability to the earnings growth of these industry players.
The ‘Magnificent Seven' have only managed to double their earnings in the first quarter of 2024, though Goldman Sachs forecasts that kind of growth rate as unsustainable. Of course, as Peltier & Smith indicated, only a few firms have successfully maintained such a high level of earnings growth in the long run. The analysts point to an apparent slowdown in this increase in the profit growth of these firms as they get harder comparisons to previous values.
On the other hand, the S&P 500's ‘Other 493' stocks that are considered to lag the headline performers are outlined to experience higher rates of earnings growth, thereby increasing the performance gap.
Two very different approaches to comparing the differently weighted indices were presented, with Goldman suggesting the equal-weighted index of the S&P 500 may even outstrip its capitalized equivalent by 0.08 a year until 2034.
Goldman's expectation is radically different from the average Wall Street forecast, which puts the expected annual returns on the S&P 500 for the next ten years at between 4.4% and 7.4%. This forecast raises more concern about the sustainability of the present and future markets, particularly under the historic concentration level.
