The S&P 500 (SNPINDEX: ^GSPC) is synonymous with the U.S. stock market. The index returned 13% annually over the last decade, outperforming most other asset classes, including international stocks, fixed income, precious metals, and real estate. But Goldman Sachs recently shocked Wall Street with a grim warning: The S&P 500 may return just 3% annually over the next decade.
That dire forecast is based on two observations: First, the index is highly concentrated in that the Magnificent Seven account for one-third of its weight. Analysts see that as problematic because “it is extremely difficult for any firm to maintain high levels of sales growth and profit margins over a sustained period of time.”
Second, the stock market’s current valuation is stratospheric, at least according to one metric. The S&P 500 trades at a cyclically adjusted price-to-earnings (CAPE) ratio of 38, a reading that ranks in the 97th percentile since 1930. That means stocks have only been more expensive 3% of the time in the last 95 years.
To that end, Goldman Sachs expects the next decade to be dismal for the S&P 500. But investors should take that warning with a huge helping of salt. Here’s why.
Wall Street has a poor track record when it comes to forecasting the future performance of the stock market. Since 2020, there has been a 17-percentage-point discrepancy between analysts’ median year-end forecast for the S&P 500 and where the index actually finished each year, according to Goldman Sachs.
Irony notwithstanding, Goldman Sachs itself has contributed to that trend by consistently making inaccurate predictions regarding the S&P 500’s annual performance, as detailed below:
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In December 2019, Goldman Sachs estimated the S&P 500 would finish 2020 at 3,400. But the index ended the year 10% higher at 3,756.
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In December 2020, Goldman Sachs estimated the S&P 500 would finish 2021 at 4,300. But the index ended the year 11% higher at 4,766.
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In December 2021, Goldman Sachs estimated the S&P 500 would finish 2022 at 5,100. But the index ended the year 24% lower at 3,893.
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In December 2022, Goldman Sachs estimated the S&P 500 would finish 2023 at 4,000. But the index ended the year 19% higher at 4,769.
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In December 2023, Goldman Sachs estimated the S&P 500 would finish 2024 at 5,100. But the index is currently 14% higher at 5,800.
During the last five years, Goldman Sachs was at least 10% off the mark with its year-end forecasts for the S&P 500, and the median prediction was 14% too low. If analysts struggle to predict performance over a single year, then the probability of an accurate prediction over an entire decade is statistically insignificant. Indeed, Warren Buffett once referred to stock market forecasts as “poison.”
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