Goldman Sachs strategists have issued a stark warning: the extraordinary performance of the S&P 500 over the past decade is unlikely to continue. They predict a significant slowdown in returns, urging investors to brace themselves for a new era in the market.

The S&P 500 has enjoyed an impressive bull run since the global financial crisis. Fueled by near-zero interest rates and robust economic growth, the index has delivered an annualized nominal total return of 13% over the past ten years. This performance far surpasses the long-term average of 11%.

However, Goldman Sachs strategists including David Kostin believe this period of exceptional growth is ending. In fact, they project an annualized nominal total return of just 3% for the S&P 500 over the next decade — one of the lowest decadal returns in the index’s history.

Several factors contribute to this pessimistic outlook:

Current stock market valuations are high by historical standards. This suggests that future returns are likely to be lower.

The market is heavily concentrated in a handful of mega-cap technology stocks. This concentration increases volatility risk and makes the index’s performance overly reliant on the fortunes of a few companies.

The era of near-zero interest rates is over. Rising interest rates make bonds a more attractive investment option, potentially diverting funds away from equities.

The global economy faces numerous challenges, including inflation, geopolitical tensions, and the risk of recession. These factors could weigh on corporate earnings and dampen investor sentiment.

Bonds May Outperform Stocks

Goldman Sachs strategists see a 72% chance that the S&P 500 will underperform Treasury bonds over the next decade. This is a significant shift from the recent past, where stocks have consistently outperformed bonds.

Furthermore, there is a 33% likelihood that the S&P 500 will lag inflation through 2034. This means that investors’ real returns (after adjusting for inflation) could be negative.

This outlook has significant implications for investors. It suggests that the traditional buy-and-hold strategy for equities may not be as effective in the coming years. Investors may need to consider a more diversified approach, including allocating more funds to bonds and other asset classes.

The Goldman Sachs strategists also expect a shift in market leadership. They predict the S&P 500, which gives equal weight to all stocks in the index, will outperform the market cap-weighted benchmark over the next decade. This suggests smaller companies may offer better investment opportunities than their larger counterparts.

The Goldman Sachs report serves as a wake-up call for investors. While the S&P 500 has delivered stellar returns in recent years, the future may be less rosy. Investors need to be prepared for lower returns and consider adjusting their investment strategies accordingly.