Expert: S&P 500 shares could be in for a 'lost decade'

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Any ASX investor who has been invested in S&P 500 Index (SP: .INX) shares or an ASX S&P 500 ETF for longer than a month has been richly rewarded for doing so.

Take the performance of the iShares S&P 500 ETF (ASX: IVV), the most popular (albeit only) ASX ETF that covers the S&P 500 Index.

As of 30 September, this index fund has returned an average of 13.14% per annum over the past three years. That extends to 14.99% per annum over the past five and 15.8% over the past ten. It’s also returned an astonishing 26.44% since 30 September 2023.

As such, we can conclude that anyone who has bought IVV units on the ASX at any time over the past decade probably doesn’t regret their decision today. They’ve certainly done better than any patriotic investors who decided to invest in an ASX index fund instead.

To illustrate that point, the ASX’s most popular index fund – the Vanguard Australian Shares Index ETF (ASX: VAS) – has delivered an average return of 8.86% per annum over the ten years to 30 September 2024. Now that’s an objectively solid return. But it just happens to be almost half of what an S&P 500 ETF would have returned over the same period.

So, any ASX investor comparing the performances of these two markets today might think that it’s a no-brainer to invest in S&P 500 shares today over ASX shares.

Well, one investing expert thinks that might be a big mistake.

Expert calls ‘lost decade’ for S&P 500 shares

As reported by the Australian Financial Review (AFR) this week, David Koston, equity strategist at investment bank Goldman Sachs, is warning investors that the S&P 500 could be facing a “lost decade” of returns.

Kostin’s model is reportedly forecasting that the S&P 500 will return an average of just 3% per annum (including dividend returns) over the coming ten years. That’s 1% per annum, accounting for the effects of inflation.

The model is bearish on S&P 500 shares for a few reasons. Firstly, it is taking into account that the S&P 500 is trading on an elevated earnings multiple right now. At least compared to its historical average.

Kostin notes that while US stock valuations are “not overly alarming when viewed in the context of the underlying interest rate environment and current profitability profile of the index”, they are still high compared to how the S&P 500 has been valued in the past.

Another point of concern is how concentrated the S&P 500 is today, compared to the past. Kostin points out that the ten largest S&P 500 shares – which include the ‘Magnificent Seven’ tech giants, as well as Berkshire Hathaway, Broadcom and Eli Lilly – now account for a whopping 36% of the entire S&P 500. Remember, the S&P 500 is made up of 500 different stocks.

According to Kostin, high concentration on the index has led to ” increased volatility and slower earnings growth” in the past.

Foolish takeaway

Predictions from any investor, be they an expert or ‘model’, should always be taken with a grain of salt. None of us knows what the markets will do tomorrow, let alone over the next year or decade.

However, Kostin arguably makes some good points. We might indeed find that ASX shares prove to be a better investment over the coming ten years, just as S&P 500 shares were over the past ten. We’ll see who’s right in 2034.