Goldman Sachs says the market will stink for 10 years. Here’s how to beat it.

The bad news for investors expecting the stock market to continue its incredible bull run is not going to happen. This word from Goldman Sachs, all the same In its latest long-term forecast, the investment bank said productivity S&P 500 (^GSPC 0.16%) over the next 10 years should seriously pale in comparison to the past 10. And the argument made to support this prediction is not entirely unfounded.

But if Goldman Sachs is right about the overall market trend for the next decade, what to make of it?

It turns out there are some important steps you can take that can help your portfolio outperform the overall market during this upcoming lethargic period.

Here is the headwind

To put more concrete numbers on this forecast, after an average annual return of 13% over the past 10 years, the S&P 500 is set for an average annual gain of just 3% for following 10, predicts Goldman’s chief American equity strategist David Costin. why Mainly because the index is overweight with a small amount of (very) high growth technologies companies in an economic environment where “it is extremely difficult for any firm to maintain high levels of sales growth and profit margins over long periods of time.”

The stocks in question are, of course, recent mega-winners Nvidia, Microsoftand other participants of the so-called A wonderful seven.

^SPXIFTS data on YCharts.

And Kostin’s concern is valid. Currently, the 10 largest constituents of the S&P 500 are a group that includes Berkshire Hathaway (BRK.A) (BRK.B -0.84%) — make up approximately 30% of the index value. Because the S&P 500 is market capitalization weighted index — each company’s position in it is proportional to that company’s market value relative to the total — if the growth of these giant companies hits a wall, the growth of the index will also hit. This risk is compounded by the fact that the S&P 500’s forward price-to-earnings ratio is now 24.

Although Goldman Sachs’ outlook is bleak, it is not alone in its pessimism. Based on such problems, JPMorgan ChaseExpectations for the next decade are only slightly better at 6% annual growth.

However, you can do better than either of these perspectives.

Priority holdings for the next decade

These caveats touch on an important but often forgotten aspect of investing: While the S&P 500 is supposed to represent a well-balanced and diversified cross-section of the US economy, there are times when it makes sense to approach “the market” differently. .

Goldman Sachs even talks about it. As part of its analysis, the bank also predicts that the S&P 500 balanced The benchmark index will outperform over the next decade because it is not dominated by large-cap stocks that are expected to slow. In an equal weight fund, all positions are returned to the same size several times a year. Investing in Invesco S&P 500 Equal Weight ETF (RSP -0.30%) this is an easy way to implement this strategy.

Perhaps there is a more efficient way to achieve market outcomes without abandoning this idea indexing although It is the possession of something similar Vanguard S&P 500 Value ETF (VOOV -0.63%)or conglomerate-like Berkshire Hathaway. While this may mean you’re missing out on the benefits of a few select growth stories, this investment certainly won’t be deterred by the projected stagnation of recently popular growth stocks.

Along those lines, another factor that supports this argument is that the era of ultra-low interest rates that made growth stocks far more attractive than value stocks has officially come to an end. Investment-grade corporate bond yields are near a 10-year high, and there are no signs that they will decline significantly anytime soon. We can easily see value stocks catch up to their growth rivals in the coming years.

Finally, while Goldman Sachs argues that large- and mega-cap stocks are overvalued, the same cannot be said for small hatsor even medium sized. These groups have lagged behind the large-cap herd largely because many investors would rather invest in the stock’s history than look for compelling small-cap offerings. The iShares S&P 600 Small Cap ETF (IJR -0.46%) trades at a price-to-earnings ratio of less than 17, while iShares S&P 400 Mid-Cap ETF (IJH 0.11%) is just as cheap at just over 19 times trailing earnings. Either could be a great way to outperform the S&P 500 now that the conditions are set for a major shakeup in the leadership of these market cap groups.

^SPX data on YCharts.

Just keep it in perspective

Admittedly, this is a philosophical thing… a far cry from the hot-trade approach that even many buy-and-holds have been using lately.

Yeah, it’s worked pretty well so far. However, if the winds of change do blow, true long-term investors would be well-advised to return to better stock-picking habits. They will want to think bigger, which they certainly are exchange funds provide the best value.

With all this in mind, take Goldman Sachs’ forecast with a grain of salt. No one can predict the future, and the probable future changes anyway. While the Magnificent Seven may be headed for a period of so-called growth, who’s to say that a few other stocks won’t take their place and outgrow the S&P 500 over the next 10 years? The best way to make sure these stocks are in your portfolio is to have at least a small stake in an S&P 500 index fund.

The bottom line is that diversification is still a good idea. You’ll just want to consider forms of diversification outside of the underlying S&P 500 fund.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Goldman Sachs Group, JPMorgan Chase, Microsoft, Nvidia and the iShares Trust-iShares Core S&P Small-Cap ETF. The Motley Fool recommends long $395 January 2026 Microsoft calls and short $405 January 2026 Microsoft calls. A motley fool has a disclosure policy.