Why Goldman has backed away from its lost decade forecast for stocks

Goldman Sachs made waves in October 2024 when David Kostin, the bank’s chief US equity strategist at the time, forecasted that the S&P 500 would return on average just 3% a year over the following decade.

Kostin was among a chorus of Wall Street strategists warning of a lost-decade ahead for stocks — the idea that a high cyclically-adjusted price-to-earnings ratio for the S&P 500 would lead to a 10-year run of dismal returns.

The math on such a call makes sense. Here’s a chart from Michael Finke, a professor of wealth management at The American College of Financial Services, showing the close relationship between the S&P 500’s CAPE ratio and returns in the follwoing decade. The orange dots show predicted returns while the blue dots show actual returns.

When Kostin made his call, the CAPE ratio was at 38-times earnings, implying low-single-digit annualized returns.

Today, the S&P 500’s CAPE ratio sits at 40, putting implied returns right around 0%.

And yet, the bank has adopted a more optimistic outlook. Ben Snider, who took over as Goldman’s chief US equity strategist in January, told Business Insider in a June 29 interview that the bank forecasts 7% annualized returns over the next decade.

That’s still below the S&P 500’s long-term average return of around 10% going back to the 1950s, but more than double the returns Goldman had forecasted just a couple of years ago.

Why the change? Snider said it comes down to the view that equity valuations can actually remaind high going forward.

“I don’t think investors should expect valuation multiples to decline to, for example, their long-term averages,” Snider told Business Insider.

His view can be chalked up to the two factors that drive valuation multiples the most, he said: interest rates and corporate profits.

Both are well separated from their long-term averages in recent decades. S&P 500 profit margins are at around 13% today compared to about 5.5% in 1980. Meanwhile, both long- and short-duration interest rates, though they’ve risen since 2022, are still well below their long-term averages. Low interest rates and strong profits have historically boosted valuations, and Snider doesn’t see any reason for either trend to reverse anytime soon.

“It doesn’t seem very likely that those will return to their long-term averages, and therefore, the assumption that valuation multiples should return to their long-term averages does not seem like a very compelling argument.”

But the favorable trends on both fronts are a double-edged sword, as Snider sees it. While profit growth and interest rates may not mean revert, they’ll also have a hard time continuing on their torrid pace, Snider said, hence his below-average forecast of 7% average returns.

Though Goldman’s outlook has grown a bit more upbeat in recent years, plenty of other Wall Street firms and strategists are still calling for a lost decade ahead.

With valuations high, Richard Bernstein, founder of Richard Bernstein Advisors, recently harkened back to the 2000-2009 period when the S&P 500 delivered negative returns. And Torsten Sløk, the chief economist at Apollo, and Tim Ayles, investment director at The Mather Group, have said in recent months that a decade of flat returns is could be ahead for the benchmark index.