The S&P 500's average yearly returns over the coming decade will be less than half what they were over the previous one, but U.S. equities will almost certainly outperform bonds, according to Goldman Sachs.
The large-cap index will deliver a 6% average annualized return over the next 10 years, with a range of 2% to 11% possible, Goldman Sachs analysts led by Chief U.S. Equity Strategist David Kostin wrote in a July 14 note. In July 2012, Goldman Sachs forecast an 8% return for U.S. equities over the coming decade, with a possible range of 4% to 12%. The S&P 500 actually returned 13.6% annually over the past 10 years, the bank said.
Stocks have a more than 90% likelihood of outperforming bonds through 2030, Goldman said in its global strategy paper.
The growth in S&P 500 returns over the previous 10 years was driven by historic economic expansion, plummeting interest rates, an increase in operating margins, lower tax rates and a focus by corporations on buybacks to boost earnings. About 75% of the returns over the next decade will come from price gains and 25% from dividends, according to the forecast. Kostin’s team forecasts that S&P 500 dividends will grow at an annualized rate of 3.6% during the next 10 years.
Over the past 140 years, U.S. stocks averaged 10-year returns of 9.2%, Goldman said. The worst decade was the 1930s, which delivered an average annual return of negative 4%, while the best was the 1950s, which returned 21% a year.
"A prospective 10-year annualized return of 6% would rank in the 29th percentile since 1880," the Goldman analysts wrote.
The forecast is fraught with near-term uncertainty, including the results of November’s U.S. presidential election, which could result in a tax plan that would likely reduce equity earnings, and the development of a possible coronavirus vaccine.
"The coronavirus has disrupted the economy with breathtaking speed and severity," Kostin’s team wrote. "Although the initial rebound has been swift and powerful, the pace of recovery from here is highly uncertain."
Adding to that uncertainty, Goldman economists noted that it is unclear which stocks will be in the S&P 500 over the coming decade. Since the initial returns forecast was released in 2012, 170 companies have been added to the index, including Facebook Inc. and PayPal Holdings Inc., they noted.
"It is challenging, and arguably impossible, to forecast with accuracy the long-term return of an index when constituents that may be added to the benchmark in the future may not yet have been founded," they wrote.