Experts push back on Goldman Sachs' forecast for low returns 📈
Plus a charted review of the macro crosscurrents 🔀
📉The stock market declined last week, with the S&P 500 shedding 1% to end at 5,808.12. The index is now up 21.8% year to date and up 62.4% from its October 12, 2022 closing low of 3,577.03. For more on the stock market moves, read: Keep your stock market seat belts fastened 🎢
-
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.“
Could something ‘very, very bad’ occur?
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.
“History shows that 3% returns or worse only come when something very, very bad has occurred,” Colas said. “While we are relying on press accounts of Goldman’s research, we have read nothing that outlines what crisis their researchers are envisioning. Without one, it is very difficult to square their conclusion with almost a century of historical data.“
Because of the way Wall Street research is distributed and controlled, not everyone is able to access every report, including experts who may be asked to respond to them.*
Goldman shared the report with TKer. Regarding the issue Colas flagged, Goldman does discuss those catalysts but actually highlights them as periods when their forecasting model failed.
That said, very bad things have happened in the past, and they could happen again in the future. And those events could cause stock market returns to be poor.
“Forecasting one form of economic disaster or another over the next 10 years is not much of a reach; you will be hard-pressed to think of any decade where some economic calamity or another didn’t befall the global economy,” Barry Ritholtz of Ritholtz Wealth Management wrote. “But that’s a very different discussion than 3% annually for 10 years.”
This leads me to my conclusion: It is very difficult to predict with any accuracy what will happen in the next 10 years. Goldman makes a point of this in their report. There are good cases to be made for weak returns as well as strong returns as argued by Yardeni and Colas.
Who will be right? We’ll only know in hindsight.
Generally speaking, I’m of the mind that the stock market usually goes up because we have a capitalist system that’s great at generating earnings growth, and earnings are the most important long-term driver of stock prices. And history shows there’s never been a challenge the economy and stock market couldn’t overcome. After all, the long game is undefeated.
“I have no idea what the next decade will bring in terms of S&P 500 returns, but neither does anyone else,” Ritholtz said. “I do believe that the economic gains we are going to see in technology justify higher market prices. I just don’t know how much higher; my sneaking suspicion is one percent real returns over the next 10 years is way too conservative.”
-
*NOTE: Financial research and commentary are the property of the firms and individuals producing it. While you may see us reporting on it, you won’t see us or other media outlets republishing them in these notes in full. If you want access, you have to become a client or subscribers. That said, Yardeni QuickTakes and DataTrek Research are both very good. You can subscribe to the former here and the latter here. Barry Ritholtz has been nailing it for 20 years. His work can be accessed for free here. Ben Carlson is unmatched with his daily newsletter. Sign up here.
-
Related from TKer:
Goldman cautions that predicting the next decade of returns is hard 😵💫
A very long-term chart of U.S. stock prices usually going up 📈
Review of the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
💳 Card spending data is holding up. From JPMorgan: “As of 15 Oct 2024, our Chase Consumer Card spending data (unadjusted) was 1.5% above the same day last year. Based on the Chase Consumer Card data through 15 Oct 2024, our estimate of the U.S. Census October control measure of retail sales m/m is 0.69%.“
From BofA: “Total card spending per HH was up 1.9% y/y in the week ending Oct 19, according to BAC aggregated credit & debit card data. Spending growth has recovered in the sectors that were most impacted by Hurricane Milton, e.g. clothing, furniture & transit. Even beyond these sectors, we saw broad-based increases in spending growth in the week ending Oct 19.“
For more on personal consumption, read: The state of the American consumer in a single quote 🔊
💼 Unemployment claims tick lower. Initial claims for unemployment benefits declined to 227,000 during the week ending October 19, down from 242,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more on the labor market, read: The labor market is cooling 💼
👍 Consumer vibes improve. From the University of Michigan’s October Surveys of Consumers: “Consumer sentiment lifted for the third consecutive month, inching up to its highest reading since April 2024. Sentiment is now more than 40% above the June 2022 trough. This month’s increase was primarily due to modest improvements in buying conditions for durables, in part due to easing interest rates.”
Relatively weak consumer sentiment readings appear to contradict resilient consumer spending data. For more on this contradiction, read: What consumers do > what consumers say 🙊 and We're taking that vacation whether we like it or not 🛫
🏚 Home sales fall. Sales of previously owned homes decreased by 1% in September to an annualized rate of 3.84 million units. From NAR chief economist Lawrence Yun: “There are more inventory choices for consumers, lower mortgage rates than a year ago and continued job additions to the economy. Perhaps, some consumers are hesitating about moving forward with a major expenditure like purchasing a home before the upcoming election.”
For more on housing, read: The U.S. housing market has gone cold 🥶
💸 Home prices cooled. Prices for previously owned homes declined from last month’s levels, but they remain elevated. From the NAR: “The median existing-home price for all housing types in September was $404,500, up 3.0% from one year ago ($392,700). All four U.S. regions registered price increases.”
🏘️ New home sales rise. Sales of newly built homes jumped 4.1% in September to an annualized rate of 738,000 units.
🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.54%, up from 6.44% last week. From Freddie Mac: “The continued strength in the economy drove mortgage rates higher once again this week. Over the last few years, there has been a tension between downbeat economic narrative and incoming economic data stronger than that narrative. This has led to higher-than-normal volatility in mortgage rates, despite a strengthening economy.”
There are 146 million housing units in the U.S., of which 86 million are owner-occupied and 39% of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy on Tuesday fell seven tenths of a point last week to 60.7%. Most of the 10 tracked cities experienced lower peak day occupancy than the previous week, likely due to the federal holiday on Monday. Los Angeles had its highest single day of occupancy since the pandemic, up 1.9 points from the previous Tuesday to 56.3%. The average low across all 10 cities was on Friday at 31.9%, down eight tenths of a point from the previous week.“
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
👎 CEO’s are less optimistic. The Conference Board’s CEO Confidence index in Q4 2024 signaled cooling optimism. From The Conference Board’s Dana Peterson: “CEO optimism continued to fade in Q4, as leaders of large firms expressed lower confidence in the outlook for their own industries. Views about the economy overall—both now and six months hence — were little changed from Q3. However, CEOs’ assessments of current conditions in their own industries declined. Moreover, the balance of expectations regarding conditions in their own industries six months from now deteriorated substantially in Q4 compared to last quarter. Most CEOs indicated no revisions to their capital spending plans over the next 12 months, but there was a notable increase in the share of those expecting to roll back investment plans by more than 10%.“
👍 Survey signals growth. From S&P Global’s October Flash U.S. PMI: “October saw business activity continue to grow at an encouragingly solid pace, sustaining the economic upturn that has been recorded in the year to date into the fourth quarter. The October flash PMI is consistent with GDP growing at an annualized rate of around 2.5%. Demand has also strengthened, as signalled by new order inflows hitting the highest for nearly one-and-a-half years, albeit with both output and sales growth limited to the services economy.”
Keep in mind that during times of perceived stress, soft data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
🏭 Business investment activity ticks higher. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — increased 0.5% to a record $74.05 billion in September.
Core capex orders are a leading indicator, meaning they foretell economic activity down the road. While the growth rate has leveled off a bit, they continue to signal economic strength in the months to come.
For more, read: The economy has gone from very hot to pretty good 😎 and 'Check yourself' as the data zig zags ↯
🇺🇸 Most U.S. states are still growing. From the Philly Fed’s September State Coincident Indexes report: "Over the past three months, the indexes increased in 34 states, decreased in 10 states, and remained stable in six, for a three-month diffusion index of 48. Additionally, in the past month, the indexes increased in 36 states, decreased in seven states, and remained stable in seven, for a one-month diffusion index of 58.”
For more on economic growth, read: Economic growth: Slowdown, recession, or something else? 🇺🇸
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 3.3% rate in Q3.
For more on the economy, read: The US economy is now less ‘coiled’ 📈
Putting it all together 🤔
The outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand for goods and services remains positive as the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.
To be clear: The economy remains very healthy, supported by very healthy consumer and business balance sheets. Job creation remains positive. And the Federal Reserve – having resolved the inflation crisis – has shifted its focus toward supporting the labor market.
Though we’re in an odd period in that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
That said, analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
High and rising interest rates don't spell doom for stocks👍
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
How stocks performed when the yield curve inverted ⚠️
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
