The bonanza in the U.S. stock market in the past 10 years won’t be repeated in the coming decade, according to Goldman Sachs. Strategist Peter Oppenheimer expects the S & P 500 to return just 6.5% on an annualized basis to investors in the next 10 years, including dividends. That’s a far cry from the nearly 15% total return the benchmark has delivered in the past 10 years. Oppenheimer pointed to lackluster valuations and relatively weak dividend yields going forward. “The building blocks of our base case 6.5% return forecast consist of 6% annualized earnings per share growth, a 1% annualized decline in valuations and a 1.4% average dividend yield,” he wrote. “While valuations are very high today relative to history, multiples have generally trended higher during the last several decades,” he said. “This trend can largely be explained by the trend lower in interest rates and [trend] higher in corporate profitability. Going forward, without a dramatic increase in interest rates and/or sharp decline in corporate profitability, we think it likely that U.S. equity valuations will remain above long-term averages.” The S & P 500 currently trades at a forward price-to-earnings ratio of about 23 — near its highest levels of the past decade. Investors have been willing to pay that premium as they chase expected returns from artificial intelligence, pushing the benchmark stock index to all-time highs. Many companies working in AI have posted sharp earnings growth in the past few years. “The extraordinary earnings strength and elevated valuations of the largest U.S. firms have helped boost the earnings growth, multiples and returns of the aggregate U.S. equity market in recent years … If the profitability and/or valuations of the largest companies falter, unless another cohort of ‘superstars’ emerges, returns for the broad market will likely be hampered,” wrote Oppenheimer. As for dividends going forward, a 1.4% yield is well below that of the 10-year Treasury note yield, which is above 4%. Investors can also get more yield by holding a 2-year Treasury note (3.56% as of Wednesday morning). Bottom line: If Oppenheimer is correct, S & P 500 returns over the next decade will leave much to be desired, at least relative to those seen in the past 10 years.
Goldman expects the boom in stocks to slow dramatically in next 10 years
