Experts push back on Goldman Sachs’ forecast for low returns

By Investor Empires On Oct 27, 2024

Goldman Sachs The fact that the S&P 500 will deliver annual nominal total returns of 3% over the next 10 years has received a lot of attention. (Read TKer’s perspective and .)

I think Ben Carlson from Ritholtz Wealth Management BEST: “It’s rare to see such low 10-year returns, but it can happen. Nearly 9% of all rolling 10-year annualized returns have been 3% or less…so this is unlikely.” But it is possible.

Investors may want to hear a more definitive point of view. but These types of inaccurate assessments are the best we can do when we manage our expectations.

However, last week came with many on Wall Street backing away from Goldman’s forecasts.

JPMorgan Asset Management (JPMAM) expects US large-cap stocks to deliver an “annual return of 6.7% over the next 10 to 15 years.” .

“I feel more confident in our numbers than theirs over the next decade,” said David Kelly of JPMAM . “But overall, we think U.S. companies are outliers — they have sharp stances and are very good at increasing margins.”

“In our opinion, even Goldman “We may not be optimistic enough,” Yardeni said . “If the productivity growth boom continues through the end of the decade and into the 2030s, as we expect, the average annual return for the S&P 500 should at least match the 6% to 7% achieved since the early 1990s. It should be closer to 11% including reinvested profits.

“In our view, there is unlikely to be a lost decade on the horizon for US stocks if earnings and dividends continue to grow at a strong pace supported by higher margins thanks to better technology-led productivity growth,” Yardeni said.

Nicholas Colas, co-founder of Datatrek Research, is encouraged by the current state of the stock market and where it could be headed.

“The S&P 500 begins the next decade filled with profitable global companies, and there are more in the pipeline,” Colas wrote on Monday. “Ratings reflect that, but they can’t know what the future holds.”

He believes that “the next decade will see S&P returns at least as strong as the long-term average of 10.6%, and perhaps better.”

Colas noted that historical cases in which returns were less than 3% “always involved very specific triggers that explained those below-average returns.” The Great Depression, the oil shock of the 1970s and its aftermath, and the global financial crisis were all linked to these low returns. -Year returns.

“History shows that returns of 3% or worse only come when something very bad happens,” Colas said. “Although we rely on press reports on Goldman’s research, we have not read anything that specifies what kind of crisis the researchers envision. Without this, it is very difficult to reconcile their conclusions with nearly a century of historical data.”

Because of the way Wall Street research is distributed and controlled, not everyone has access to every report, including the experts who may be asked to respond to them.

Goldman shared the report with TKer. Regarding the issue mentioned by Colas, Goldman discusses these drivers but actually highlights them .

However, very bad things have happened in the past, and they could happen again in the future. These events may cause weak stock market returns.

Predicting one form of economic disaster over the next ten years is not far-fetched; “You would be hard-pressed to think of any decade in which the global economy has not been struck by one economic disaster or another,” said Barry Ritholtz of Ritholtz Wealth Management. . “But that’s a very different discussion than 3% a year for 10 years.”

This leads me to my conclusion: It is very difficult to predict with any degree of accuracy what will happen in the next ten years. In their report. There are good cases to be made for weak returns as well as strong returns as Yardeni and Colas argue.

Who will be right? We will not know until it is too late.

In general, I am of the opinion that Because we have And profits are . and There has never been a challenge that the economy and stock market could not overcome. After all, .

“I have no idea what the next decade will bring in terms of S&P 500 returns, but neither does anyone,” Ritholtz said. . “I think the economic gains we’ll see in technology justify higher market prices. I don’t know how much higher. My sneaking suspicion is that real returns of one percent over the next 10 years are way too conservative.”

There were some notable data points and macroeconomic developments from last week to take into account:

Card spending data is holding up. From JPMorgan: “As of October 15, 2024, Chase Consumer Card spending data (unadjusted) was 1.5% higher than the same day last year. Based on Chase Consumer Card data through October 15, 2024, our estimate of the U.S. Census control measure For October monthly retail sales is 0.69%.

From Bank of America: “Total card spending per household rose 1.9% year over year in the week ending October 19, according to combined credit and debit card data from Bank of America. Spending growth rebounded in sectors most impacted by Hurricane Milton, such as apparel and furniture And transportation. Even outside of these sectors, we saw broad increases in spending growth in the week ending October 19.

Unemployment claims are declining. It fell to 227,000 during the week ending October 19, down from 242,000 the week before. This measure is still at levels historically associated with economic growth.

Consumer sentiment improves. From the University of Michigan : “Consumer sentiment rose for the third straight month, rising to its highest reading since April 2024. Sentiment is now more than 40% above the June 2022 low. The increase this month is primarily due to a modest improvement in durable goods purchasing conditions. This is partly due to easing interest rates.

Home sales decline. It fell 1% in September to an annual rate of 3.84 million units. From NAR Chief Economist Lawrence Yun: “There are more inventory choices for consumers, mortgage rates are lower than they were a year ago and job additions to the economy continue. Some consumers may be hesitant to move forward with a big spend like buying a home before the next election.”

Cooling house prices. Prices for previously owned homes are down from last month’s levels, but remain high. from : “The median current home price for all housing types in September was $404,500, up 3.0% from a year ago ($392,700). All four U.S. regions recorded price increases.

New home sales rise. It jumped 4.1% in September to an annual rate of 738,000 units.

Mortgage rates mark a higher mark. according to The average 30-year mortgage rose to 6.54%, compared to 6.44% last week. From Freddie Mac: “Continued strength in the economy sent mortgage rates higher again this week. Over the past few years, there has been a tension between a pessimistic economic narrative and stronger incoming economic data than that narrative. This has led to higher than usual volatility in Mortgage rates, despite the strengthening economy.

there In the United States, of which 86 million and From her . Among those carrying mortgage debt, almost all of them and most of those mortgages Before prices rebound from their 2021 lows. All of this means that most homeowners are not particularly sensitive to movements in home prices or mortgage rates.

The offices are still relatively empty. from : “Office occupancy at Tuesday’s peak fell seven-tenths of a point last week to 60.7%. Most of the 10 cities tracked saw a decline in daily occupancy compared to the previous week, likely due to the federal holiday on Monday. Los Angeles saw its highest occupancy day Singles since the pandemic, up 1.9 points from the previous Tuesday to 56.3% and the average decline across all 10 cities on Friday was 31.9%, down eight-tenths of a point from the previous week.

CEOs are less optimistic. Conference Board The fourth quarter of 2024 indicated cooling optimism. From the Conference Board’s Dana Peterson: “CEO optimism continued to wane in the fourth quarter, as leaders of large companies expressed declining confidence in the outlook for their industries. Views on the economy overall — now and six months later — were little changed from the third quarter However, CEOs’ assessments of current conditions in their industries declined.

Moreover, the balance of expectations regarding conditions in their industries six months from now deteriorated significantly in the fourth quarter compared to the last quarter. Most CEOs indicated no adjustments to their capital spending plans over the next 12 months, but there was a notable increase in the share of those who expect to back away from their investment plans by more than 10%.

Scanning indicates growth. From Standard & Poor’s Global “October saw business activity continue to grow at a strong and encouraging pace, maintaining the economic improvement recorded since the beginning of the year through the fourth quarter.

October’s flash Purchasing Managers’ Index (PMI) corresponds to GDP growth at an annual rate of about 2.5%. Demand also strengthened, as evidenced by new order inflows reaching their highest levels in almost a year and a half, although production and sales growth was limited to the services economy.

Keep in mind that in times of perceived stress, soft data tends to be more exaggerated than actual hard data.

Business investment activity is rising. For non-defense capital goods excluding aircraft – aka – It rose 0.5% to a record high of $74.05 billion in September.

The basic capex orders are a Which means it predicts future economic activity. While the growth rate may they continue to indicate economic strength in the coming months.

Most US states are still growing. From the Federal Reserve Bank of Philadelphia in September Report: “During the past three months, indicators rose in 34 states, decreased in 10 states, and remained stable in six, bringing the three-month prevalence index to 48 states. Last month, indicators rose in 36 states and decreased in seven states, and remained stable in Seven, for a one-month spread index of 58.

Near-term GDP growth estimates remain positive. the It sees real GDP growth rising at a rate of 3.3% in the third quarter.

The outlook for the stock market remains favorable, supported by growth . And profits are .

Demand for goods and services As the economy continues to grow. At the same time, economic growth was experienced From hotter levels earlier in the cycle. The economy is These days as well .

To be clear: the economy remains very healthy, and very supportive . Creating job opportunities . And the Federal Reserve – existence – He has .

Although we are in a strange period in terms of difficult economic data . Consumer and business sentiment was relatively weak, even as tangible consumer and business activity continued to grow and trend toward record levels. From the investor’s point of view, Is that the difficult economic data is still holding up.

However, analysts expect the US stock market to be able to do so ,thanks very much . Since the pandemic, companies have aggressively adjusted their cost structures. This came with and including devices powered by artificial intelligence technology. These moves result in positive operating leverage, which means a modest amount of sales growth – in a cold economy .

Of course, this does not mean that we should feel complacent. there will be – like , , , etc. There’s also something scary . Any of these risks could flare up and spark short-term volatility in the markets.

There is also the harsh truth that… and They are developments that all long-term investors are interested in To experience while building wealth in the markets. .

Right now, there is no reason to believe that there will be a challenge that the economy and markets will not be able to overcome over time. a series that long-term investors can expect to continue.

A version of this post first appeared on TKer.co