Will Stock Returns Be Lower Over the Next Decade?
Recently, Goldman Sachs forecasted modest 3% annualized returns for the stock market over the next decade. Among the many reasons cited, a few include -
Higher starting valuations – the overall index is more expensive than historical norms.
Market concentration – A few individual companies have carried the index higher. If they falter, the market falters.
Interest rates – Rising rates make it more expensive for companies to borrow and invest, which leads to slower growth.
Let me start by saying that 3% returns over the next decade is certainly possible. It has happened plenty of times before, including most recently in the early to mid-2000s.
However, examining such forecasts' context and historical accuracy is helpful before you let these forecasts change your investment strategy. For example, in 2014, Vanguard predicted historically lower-than-expected returns of 5-8% annually, but most stock indices have performed much better.
Let’s also examine some of Goldmans main points –
Higher starting valuations – This is the most significant risk, in my opinion. Companies must continue to grow earnings to justify valuations. However, over the past century, S&P 500 earnings have grown at 6%+ per year. At that level, stock prices would have to drop 50% to get just 3% (Yardini Research). While possible, that type of downturn is rare.
Market concentration – This is why we diversify. Plenty of other areas of the market are not as concentrated and not as expensive, such as small caps and foreign stocks.
Interest rates – This is the least of my concerns, at least for large-cap companies. Many companies are sitting on record cash levels and benefiting from higher rates because their cash is producing billions in interest annually.
Lower returns could be around the corner. We could also look back 10 years from now as a great buying opportunity due to unforeseen innovation and growth opportunities.
Instead of focusing on specific return projections, build a portfolio that aligns with your goals and risk tolerance. Diversification has felt useless for the past decade. That won’t last forever.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.