Goldman’s bearish outlook comes as the S&P 500 enters its third year of a bull market, with a 27 percent annual total return over the last two years. Investors remain optimistic, believing the US economy has weathered inflation and that future Federal Reserve rate cuts will drive further growth.
However, Goldman warns that recent returns have been driven by a small number of stocks, referred to as ‘the Magnificent Seven,’ led by companies like Nvidia and Alphabet.
The report emphasizes that it is difficult for any firm to sustain high levels of sales growth and profit margins over extended periods.
Goldman uses a cyclically adjusted price-earnings ratio (CAPE) to evaluate market valuation, stating that higher starting valuations often lead to lower future returns. The current CAPE ratio stands at 38, placing it in the 97th percentile.
According to Goldman, this high level of equity valuations is a major factor behind their low 10-year return forecast. Their model predicts annual returns ranging from plus 7 percent to negative 1 percent, with a 72 percent probability that stocks will underperform bonds over the next decade.