To The Moon

• Last week, investors were taken by surprise by Goldman Sachs’ bleak S&P 500 outlook. Goldman Sachs expects only a 3% annual return for the S&P 500 over the next 10 years. In comparison, the S&P 500 has boasted a 14% annualized return over the past decade.

• JP Morgan, on the other hand, expects a 5.7% annual return over the next 10 years.

• Both firms cited high valuations and high concentration as the main reasons for future tepid returns.

• Goldman noted that the S&P 500 is now overly reliant on a few companies (e.g., the Magnificent Seven) for outsized return contributions, making it extremely difficult for any firm to maintain high levels of sales growth and profit margins over sustained periods.

• However, Goldman also acknowledged that its model has failed on multiple occasions due to significant shocks to the economic backdrop or rapid technological changes.

My Thoughts:

• It’s hard to predict next year’s returns, and it’s probably even harder to guess what they’ll be in 10 years. So, Goldman’s estimate of a 3% annualized return over the next decade relies on a lot of assumptions falling into place.

• Since 1935, 9% of the time, the S&P 500 has provided a 3% or less rolling annualized return. The dismal rolling annualized returns mostly occurred during the Great Depression in the 1930s and the 2008 global financial crisis. For Goldman’s bleak model to hold true, we may need to see a significant financial crisis.

• Investors should not panic over this cautionary outlook; instead, it serves as a reminder to constantly reevaluate their portfolios.

• Perhaps AI could save your portfolio: AI is a transformative trend and is expected to boost corporate earnings and GDP growth in the next decade. Investors may want to position themselves in AI-related stocks such as Magnificent Seven, Broadcom $Broadcom(AVGO)$ , ARM, $ARM Holdings Ltd(ARM)$ TSMC $Taiwan Semiconductor Manufacturing(TSM)$ , and Oracle $Oracle(ORCL)$ .

Source: A Wealth of Common Sense