Goldman Sachs Predicts Bleak Long-Term S&P 500 Returns As Market Concentration Hits 'Highest Level In 100 Years'

Goldman Sachs has issued a stark warning for U.S. equity investors, predicting significantly lower returns for the S&P 500 over the next decade due to historically high levels of market concentration.

The firm's analysts, including David J. Kostin and Ben Snider, highlight that the current concentration in the U.S. stock market is the highest it has been in the past century, which they believe could weigh heavily on long-term index returns.

Market concentration currently ranks “near the highest level in 100 years,” analysts warned, adding that their “S&P 500 baseline 10-year return forecast is lower than the estimates of other market participants.” 

Long-Term Return Forecast: Only 3% Annually Over the Next Decade

Goldman Sachs forecasts that the S&P 500 will deliver an annualized nominal total return of just 3% over the next 10 years—placing it in the 7th percentile of historical returns since 1930. Adjusting for inflation, the real return is expected to be around 1%.

This projection stands in stark contrast to the past decade, where the S&P 500 delivered a robust 13% annualized total return, placing it in the 58th historical percentile.

“The current extremely high level of market concentration is one of the main drags on our return forecast,” analysts wrote in their report.

If the current high level of market concentration were excluded from the model, the firm’s baseline forecast would improve by 4 percentage points, yielding a 10-year return estimate of 7%, which would rank in the 22nd historical percentile.

The Impact of Market Concentration on Returns

The extreme market concentration—driven by a handful of mega-cap companies like Apple Inc. AAPL, Microsoft Corp. MSFT, Amazon.com Inc. AMZN, Nvidia Corp. NVDA and Alphabet Inc. GOOGL—means that the performance of the S&P 500 is increasingly dependent on the fortunes of a small number of firms.

“When equity market concentration is high, the performance of the aggregate index is strongly dictated by the prospects of a few stocks,” Goldman Sachs explained.

Historically, it has been challenging for any firm to sustain high levels of sales growth and profitability over long periods. As growth decelerates for these market leaders, overall earnings growth for the index tends to slow down, pulling down returns.

Another major risk is government regulation, which has previously caused growth slowdowns for dominant firms.

Goldman Sachs highlighted historical examples where regulation led to a decline in market dominance:

• International Business Machine Corp. IBM: In 1969, IBM faced a government lawsuit that weighed on its valuations. Though the lawsuit was dropped in 1982, the company's growth slowed afterward.
• AT&T T: The telecom giant faced a breakup order in 1982 following a lawsuit filed in 1974, which led to slower growth. However, AT&T's valuations initially rose after the breakup.
• Microsoft: In 1998, Microsoft faced antitrust lawsuits that led to a settlement in 2000. The tech giant's growth and valuations suffered for a significant portion of the following decade.

Equal-Weighted S&P 500 Index May Outperform, Bonds To Pose A Growing Appeal

Given the risks of high market concentration, Goldman Sachs anticipates that the S&P 500 equal-weighted index, which gives each stock the same weight regardless of size and is tracked by the Invesco S&P 500 Equal Weighted ETF RSP, could outperform the traditional market cap-weighted index (where larger companies have more weight) over the next decade.

They estimate the equal-weighted index could surpass the cap-weighted index by an annualized margin of 200 to 800 basis points (2-8%).

Adding to the challenges facing the S&P 500, Goldman Sachs predicts that stocks will face increasing competition from bonds in the years ahead.

With the current 10-year U.S. Treasury yield around 4% and inflation expectations of 2.2% over the next decade, Goldman Sachs estimates that the S&P 500 has a 72% probability of underperforming bonds over the next 10 years.

Furthermore, the analysts give the S&P 500 a 33% chance of underperforming inflation during this period.

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