Goldman Sachs predicts a dead decade for the S&P 500. Should you sell your stocks?

The S&P 500 (SNPINDEX: ^GSPC) 2024 should be a remarkable year.

The broad market index had its best start since 1997 through the first nine months of the year.

However, according to Wall Street, none of this should have happened. At the start of the year, consensus on Wall Street called for the S&P 500 to remain flat as analysts saw a wide range of risks, including higher valuations, doubts about the Federal Reserve’s soft landing and geopolitical concerns.

While that turned out to be completely wrong, one of the country’s most respected investment banks is now predicting a lost decade for stocks.

Goldman Sachs calls time on a bull market

In a recent report Goldman Sachs predicted that the index would achieve an annual total return of 3% over the next 10 years.

Over ten years, this equates to a return of just 34%, which would put it in the 7th percentile of 10-year returns since 1930. By contrast, the S&P 500 has jumped 38% in the past year alone.

Among the risks Goldman’s research teams see is a high concentration in just a few stocks, essentially “A wonderful seven,” and a high starting cost. According to The Wall Street Journalthe S&P 500 currently trades at a price-to-earnings ratio of 25.1 and based on SKETCHprice-to-earnings ratio, which takes into account returns over the past 10 years, the stock market is even more expensive. According to Goldman, it trades at a CAPE ratio of 38, which is in the 97th percentile historically.

Concentration is a risk because market leaders struggle to sustain the kind of growth that has fueled Magnificent Seven stocks such as Nvidia to record levels. Forecasters believe that for the bull market to continue, these gains must spread to smaller stocks.

Other investment firms also see weak performance over the next decade. JPMorgan Chase predicts an annual return for the S&P 500 over the next decade of 6%.

Image source: Getty Images.

What Goldman’s Forecast Really Means

Although Goldman didn’t say so specifically, the forecast likely calls for at least one bear market over the next 10 years. Without a big fall in stocks, it’s unlikely that the S&P 500 will rise just 34% over the decade.

Investors have faced this ailment before, and more recently than one might think. From 2000 to 2009, the S&P 500 fell 24% as investors faced the twin setbacks of the bursting of the dot-com bubble and the Great Financial Crisis.

Of course, what happened over the next decade more than made up for it in the following decade, as the index jumped 189% from 2010 to 2019.

It is impossible to predict whether there will be a bear market over the next decade, although it is likely based on historical averages. However, any number of factors, visible and invisible, could affect the stock market over the next decade. These include economic ones such as valuation, GDP growth and monetary policy, as well as the development of artificial intelligence and other emerging technologies, geopolitics and black swans such as pandemics.

Should I sell my shares?

Before you even think about selling stocks, you should remember that Goldman Sachs’ forecast is just that, and Wall Street forecasts are generally not worth the paper they’re written on. But if Goldman Sachs’ forecast is to be believed — and it does include some positives about valuations — a sell-off in the stock still looks premature at this point.

The data show that the economy is strong. Corporations are reporting strong earnings growth and the Fed is planning to cut interest rates, which usually boosts the stock market.

Trying to time the market by guessing where stocks will go over the next year is generally a fool’s errand. Even Warren Buffett said, “Only an idiot tries to time the market.”

Still, selling stocks and moving into a lower-risk asset class like bonds or cash can be a smart move if you’re a retiree with a shorter time horizon. Another option for value seekers is to invest in Chinese stocks, which are currently significantly cheaper than U.S. stocks based on traditional metrics, although Chinese stocks also carry risks that U.S. stocks don’t.

For investors with a longer time horizon, you’re better off staying in the market. In fact, market sell-offs are good for pure stock buyers because you can buy them at a discount. As Warren Buffett said: “We don’t care about market downturns. This is an opportunity to increase our holdings of great companies with great management at good prices.”

Even if the S&P 500 does indeed experience a dead decade, as Goldman predicts, it will likely be followed by wild returns like we saw in the 2010s. This is reason enough to stay in the market.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, JPMorgan Chase and Nvidia. A motley fool has a disclosure policy.