Winter is coming (for stocks)

We hope you’ve enjoyed your 13% annualized returns over the past decade—and your 23% return this year—because the good times are over.

Goldman Sachs says the S&P 500 will deliver just a 3% annualized return over the next decade. Ouch.

Since 1930, the market has averaged an annual return of 11%, which makes the 13% annualized total return since 2014 pretty impressive. In fact, the S&P 500 has delivered a cumulative 233% return over the past decade—not too shabby at all.

So why the sudden slowdown?

The problem is that the market has done too well lately.

Goldman analysts, led by Chief US Equity Strategist David Kostin, arrived at that dismal 3% number by examining the market’s valuation, concentration, effect of interest rates, corporate profitability, and various macro fundamentals. The key elements here are valuation and concentration: Stock valuations have rocketed higher, particularly since 2020, while the market is “near its highest level of concentration in 100 years,” according to the analysts.

The culprits, of course, are mega-cap tech stocks like Nvidia, Apple, and Meta Platforms. The 10 largest stocks on the S&P 500 account for over a third of the index’s market cap, making it highly concentrated on a handful of companies whose prices have soared lately. If those stocks can’t maintain their growth and profitability—which Goldman Sachs worries they won’t do—then the house of cards they’ve created could come toppling down.

How to navigate the new market

Goldman Sachs pointed out some important conclusions that could set up your portfolio to make the most of the slowdown in stock market returns.

• The analysts said there’s a 72% chance of bonds outperforming stocks over the next decade.
• They also noted that the equal-weight S&P 500 should produce higher returns than the market-cap weighted index.
• Finally, they wrote that small-cap stocks outperform large-caps when market concentration is this high.

The bottom line? Sure, your portfolio may not be overflowing with profits the way it has for the last 10 years—but there are still plenty of strategies you can employ to maximize your returns.—LB