Is S&P 500 Headed For A Lost Decade? Analysts Say 'We May Have Forgotten About Dividends'

The idea of a "lost decade" for S&P 500 returns in the next 10 years has gained traction after a bearish report from Goldman Sachs earlier in October, which predicted very subdued annual returns for U.S. stocks over the next decade and possible underperformance against other asset classes.

This view, however, has sparked strong pushback from other prominent Wall Street voices, including analysts at Bank of America and veteran investor Ed Yardeni.

Goldman Sachs’ Grim Outlook: Just 3% Annual Returns Ahead

Goldman Sachs recently forecasted that the S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, will deliver an annualized nominal total return of just 3% over the next 10 years, placing this return scenario in the 7th percentile of historical outcomes since 1930. Adjusted for inflation, the real return would hover around 1% per year.

According to Goldman, the S&P 500 has a 72% probability of underperforming bonds and a 33% chance of lagging inflation through 2034.

David J. Kostin, chief U.S. equity strategist at Goldman Sachs, highlighted that extreme market concentration is a key factor weighing down their long-term outlook. Currently, the U.S. stock market is more concentrated in a few mega-cap tech names than at any point in the last century, which Kostin suggests could limit the broader market’s returns in the coming years.

Bank of America: A Case For Equal-Weighted Stocks And Dividend Reinvestment

While Bank of America's equity analyst Savita Subramanian acknowledged on Monday that the S&P 500 is "statistically expensive," she indicated potential upside in the equal-weighted version of the index, tracked by the Invesco S&P 500 Equal Weight ETF RSP.

The equal-weighted S&P 500 currently trades at a “historic discount” to the traditional, cap-weighted index and could offer more attractive returns over the next decade, according to Subramanian.

Subramanian suggests that dividends could provide an overlooked source of gains for investors.

“We may have forgotten about dividends because they did little for total returns in the past decade,” she said.

She highlighted that dividends historically contributed 40% of total returns before the period of low-interest rates prior to the pandemic.

If dividend contributions revert to historical levels, Subramanian projects that the equal-weighted S&P 500 could deliver an 8.3% total return annually, thanks in part to dividend growth from mature tech giants in the "Magnificent 7" that are now initiating dividend programs.

Ed Yardeni: Optimism For Earnings Growth And The “Roaring 2020s”

Veteran Wall Street strategist Ed Yardeni openly challenged Goldman's downbeat S&P 500 long-term forecast.

In a note published on Monday, Yardeni wrote, "We don't agree with [Goldman's recent depressing long-term prediction for S&P 500 returns."

Yardeni is forecasting annual earnings growth of at least 6% over the next decade, consistent with the S&P 500's long-term historical average of 6.5%.

Yardeni also disputed Goldman's concerns about market concentration. While tech and communication services companies now account for roughly 40% of the S&P 500—similar to their share during the dot-com bubble—he indicated that today's tech giants are financially stronger and more resilient than those in 2000.

While a “lost decade” for stocks isn’t unprecedented—the S&P 500 remained flat for 10 years after peaking in April 2000, amid the dot-com crash and the Great Financial Crisis—the investor highlighted that S&P 500 dividends still rose by 41% during that period.

If the conditions for a “Roaring 2020s” scenario take hold—marked by a productivity-driven economic boom fueled by technological advancements, with real GDP growth stabilizing around 3% annually and inflation at 2%—Yardeni forecasts an average annual total return of 11% for the S&P 500 over the next decade.

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