A version of this post first appeared on TKer.co
Goldman Sachs’ prediction that the S&P 500 will deliver 3% annualized nominal total returns over the next 10 years has gotten a lot of attention. (Read TKer’s view here and here.)
I think Ben Carlson of Ritholtz Wealth Management said it best: “It’s rare to see such low returns over a 10 year stretch but it can happen. Roughly 9% of all rolling 10 year annual returns have been 3% or less… So it’s improbable but possible.”
Investors would probably love to hear a more decisive view. But predicting long-term returns is hard, and these kinds of imprecise assessments are the best we can do as we manage our expectations.
That said, last week came with a lot of Wall Streeters pushing back on Goldman’s forecast.
JPMorgan Asset Management (JPMAM) expects large-cap U.S. stocks to “return an annualized 6.7% over the next 10-15 years,” Bloomberg reports.
“I feel more confident in our numbers than theirs over the next decade,” JPMAM’s David Kelly said. “But overall, we think that American corporations are extreme — they’ve got sharp elbows and they are very good at growing margins.“
Expectations for improving productivity, strong profit margins, and healthy earnings growth have been hot topics lately. They’re trends that Ed Yardeni of Yardeni Research also expects to drive stock prices higher for years to come.
“In our opinion, even Goldman's optimistic scenario might not be optimistic enough,” Yardeni wrote. “If the productivity growth boom continues through the end of the decade and into the 2030s, as we expect, the S&P 500's average annual return should at least match the 6%-7% achieved since the early 1990s. It should be more like 11% including reinvested dividends.”
“In our view, 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,” Yardeni said.
Datatrek Research co-founder Nicholas Colas is encouraged by where the stock market stands today and where it could be headed.
“The S&P 500 starts its next decade stacked with world class, profitable companies and there are more in the pipeline,” Colas wrote on Monday. “Valuations reflect that, but they cannot know what the future will bring.“
He believes “the next decade will see S&P returns at least as strong as the long run average of 10.6%, and possibly better.“
Colas noted that historical cases of <3% returns “always have very specific catalysts which explain those subpar returns.“ The Great Depression, the oil shock of the 1970s and its after effects, and the Global Financial Crisis were all associated with these low 10-year returns.