Is the stock market in trouble? A grim warning from Goldman Sachs shocks Wall Street.

The S&P 500 (^GSPC -0.03%) is synonymous with the US stock market. The index has returned 13% annually over the past decade, outperforming most other asset classes, including international equities, fixed income, precious metals and real estate. but Goldman Sachs recently shocked Wall Street with a grim warning that the S&P 500 could return just 3% annually for the next decade.

This dire prediction is based on two observations: First, the index is highly concentrated, with the Magnificent Seven accounting for one-third of its weight. Analysts see this as problematic because “it is extremely difficult for any firm to maintain high levels of sales growth and profit margins over a long period of time.”

Second, the current valuation of the stock market is stratospheric, at least by one measure. The S&P 500 is trading at a cyclically adjusted price-to-earnings (CAPE) ratio of 38, which is in the 97th percentile since 1930. This means that stocks have only been more expensive 3% of the time over the past 95 years.

That’s why Goldman Sachs expects the next decade to be a sad one for the S&P 500. But investors should take this warning with a large grain of salt. That’s why.

Statistically, Goldman Sachs is probably wrong

Wall Street has a poor track record when it comes to predicting future stock market performance. Since 2020, there has been a discrepancy of 17 percentage points between the average forecast of analysts at the end of the year. S&P 500 and where the index actually ended each year, according to Goldman Sachs.

Ironically, however, Goldman Sachs itself has contributed to this trend by consistently making inaccurate forecasts for the annual performance of the S&P 500, as detailed below:

• In December 2019, Goldman Sachs estimated that the S&P 500 index would end 2020 at 3,400 points. But the index ended the year 10% higher – 3756.
• In December 2020, Goldman Sachs estimated that the S&P 500 would end 2021 at 4,300. But the index ended the year 11% higher at 4,766.
• In December 2021, Goldman Sachs estimated that the S&P 500 would end 2022 at 5,100. But the index ended the year 24% lower at 3,893.
• In December 2022, Goldman Sachs estimated that the S&P 500 would end 2023 at 4,000. But the index rose 19% to 4,769 at the end of the year.
• In December 2023, Goldman Sachs estimated that the S&P 500 index would end 2024 at 5,100. But the index is now 14% higher at 5,800.

Over the past five years, Goldman Sachs has been at least 10% off the mark in its year-end forecasts for the S&P 500, and the average forecast was 14% too low. If analysts find it difficult to predict performance in one year, the probability of an accurate forecast over a decade is statistically insignificant. Really, Warren Buffett once called stock market forecasts “poison”.

In addition, while high CAPE coefficients historically correlated with low long-term returns in the S&P 500 index, some experts believe that this indicator has become less significant over time. CAPE, which divides price by average earnings adjusted for inflation over the last decade, is based on generally accepted principles of accounting (GAAP). But the definition of GAAP revenue has changed significantly over the years, making comparisons with past decades dubious at best.

Some Wall Street analysts disagree with Goldman Sachs

While Goldman Sachs predicts a bleak decade for the stock market, other Wall Street analysts have different expectations for the S&P 500. Tom Lee of Fundstrat Global Advisors believes the index could reach 15,000 points by 2030, representing a return of 17% annually from the current level. from 5,800. And Ed Yardeni and Eric Wallerstein of Yardeni Research believe the index will return 11% annually over the next decade.

Importantly, Yardeni and Wallerstein addressed stock market concentration problems in a recent paper. “While the information technology and communications services sectors now make up about 40% of the overall S&P 500, about the same as they did at the height of the dot-com bubble, these are much more robust companies.”

Indeed, for now A wonderful seven accounting for roughly one-third of the S&P 500, these seven companies collectively have profit margins that are three times higher than the other 493 companies in the S&P 500. Additionally, the Magnificent Seven are projected to report earnings growth of 34% in 2024, while the remaining 493 companies forecast earnings growth of 4%, according to JPMorgan Chase.

So what action should investors take in response to Goldman’s warning? Personally, I plan to do nothing. Wall Street has a poor track record with one-year forecasts, let alone decades. Still, nervous investors should consider buying balanced S&P 500 Index Fund. The Invesco S&P 500 Equal Weight ETF this is a good option.