The Blubber

Goldman Sachs, $GS, says that S&P 500 will post an annual return of 3% over the next decade down from 13% over the last decade.

According to Goldman Sachs, the exceptional stock market performance of the past decade could be followed by a period of significantly lower returns over the next ten years.

In a note dated October 18, Goldman analysts predicted that the S&P 500, which represents the broader market, could see an average nominal annualized return of just 3% over the next decade. The analysts set a negative 1% return as the lower end of potential outcomes, with a 7% return as the upper limit.

Even the upper end of this forecast is much lower than the above-average 13% annualized total return the market has delivered over the past decade.

"Investors should brace for equity returns in the next decade that are likely to be on the lower end of their typical range, especially compared to bonds and inflation," the analysts noted.

They also estimated a 72% likelihood that the S&P 500 will underperform bonds over the next ten years, and about a one-third chance of underperforming inflation. The analysts further highlighted a 4% chance of stocks delivering a negative absolute return over the period.

Goldman’s outlook for lower returns is partly driven by its expectation that U.S. GDP will contract over four quarters, or roughly 10% of the time, during the next decade. Additionally, the concentration of the market in a few large stocks adds volatility risk. The 10 largest companies in the S&P 500 make up more than a third of the index, and Goldman warned that this heavy dependence on a small number of stocks could hurt overall returns.

The analysts noted that if the index weren't so concentrated, their return estimate would be higher by several percentage points. As growth in sales and profitability for the biggest stocks slows, earnings growth and returns for the broader index are expected to decelerate as well.

Goldman's forecast is lower than the consensus, which expects an average annualized return of around 6% over the next decade. The analysts cautioned that many long-term investors, including corporate and public pension plans, may be overly optimistic in their return expectations.