Goldman Sachs Is Forecasting a Dead Decade for the S&P 500. Should You Sell Your Stocks?

The S&P 500 (SNPINDEX: ^GSPC) is on track for a banner year in 2024.

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 that was supposed to happen. At the beginning of the year, the Wall Street consensus called for the S&P 500 to be just flat as analysts saw a wide range of risks, including rising high valuations, doubts about the Federal Reserve achieving a soft landing, and geopolitical issues.

While that proved to be dead wrong, now one of the most respected investment banks in the country is predicting a lost decade for stocks.

Goldman Sachs calls time on the bull market

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

Over a decade, that equals a return of just 34%, which would rank in the 7th percentile of 10-year returns since 1930. By contrast, the S&P 500 has jumped 38% over just the last year.

Among the risks that Goldman's equity research teams see is a high concentration in just a few stocks, essentially the "Magnificent Seven," and a high starting valuation. According to the Wall Street Journal, the S&P 500 now trades at a price-to-earnings ratio of 25.1, and based on the CAPE, a price-to-earnings ratio that takes into account the last 10 year's worth of earnings, the stock market is even more expensive. According to Goldman, it trades at a CAPE ratio of 38, in the 97th percentile historically.

Concentration is a risk because it's hard for market leaders to maintain the kind of growth that has driven "Magnificent Seven" stocks like Nvidia to record levels. For the bull market to continue, prognosticators believe those gains need to spread to smaller stocks.

Other investment firms also see weak performance over the next decade. JPMorgan Chase sees the annual return S&P 500 return over the next decade at 6%.

Image source: Getty Images.

What the Goldman forecast really means

Though Goldman didn't specifically say it, the forecast likely assumes at least one bear market over the next 10 years. Without a significant pullback in stocks, it seems highly unlikely that the S&P 500 would only increase 34% over a decade.

Investors have endured that kind of malaise before, and more recently than you might think. From 2000 to 2009, the S&P 500 fell 24% as investors were faced with the twin setbacks of the dot-com bubble bursting and the great financial crisis.

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

It's impossible to predict whether there will be a bear market over the next decade, though it's likely, based on historical averages. However, any number of factors, seen and unseen, could impact the stock market over the next decade. Those include economic ones like valuations, GDP growth, and monetary policy, as well as the growth of AI and other emerging technologies, geopolitics, and black swan events like the pandemic.

Should you sell your stocks?

Before you consider selling stocks, you should remember that the Goldman Sachs forecast is just that, and Wall Street forecasts generally aren't worth the paper they're written on. But if you believe the Goldman Sachs forecast -- and it makes some good points about valuation -- selling stocks still seems premature at this point.

Data points show that the economy is strong. Corporations are reporting solid earnings growth, and the Fed is planning to lower interest rates, which typically fuels growth in the stock market.

Trying to time the market by guessing where stocks are going over the next year is generally a fool's errand. Even Warren Buffett has said, "Only an idiot tries to time the market."

Still, selling stocks and moving to 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-hunters is to invest in Chinese stocks, which are significantly cheaper than U.S. stocks right now based on traditional metrics, though Chinese equities also carry risks that American 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 net buyers of stocks as you can buy them at a discount. As Warren Buffett said, "A market downturn doesn't bother us. It is an opportunity to increase our ownership of great companies with great management at good prices."

Even if the S&P 500 does serve up a dead decade as Goldman predicts, it's likely to be followed by roaring returns as we saw in the 2010s. That's reason enough to stay in the market.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 822% — a market-crushing outperformance compared to 170% for the S&P 500.*

They just revealed what they believe are the 10 best stocks for investors to buy right now…

See the 10 stocks »

*Stock Advisor returns as of October 21, 2024

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. The Motley Fool has a disclosure policy.