Bloomberg Audio Studios, podcasts, radio news.
And this week you might remember, Goldman Sachs came out with a note saying that the streak of blockbuster gains for the SMP five hundred it might be over. And they say that we will only see around annual gains around three percent over the next decade compared to the average thirteen percent over the past decade. And we are joined now by Goldman Sachs chief US equity strategist David Costin,
who led that call. He joins us. Now when you think about this call, very controversial, David, and so I am very curious about kind of what the caveat is here. Is there kind of any upside that could be squeezed out of the equity market that is outside of this base case.
So let's talk about the base case for the next year, and then we'll look at the base case for the following nine years for full year decade of performance. So the next year, we're looking at the S and P five hundred rising around eight percent nine percent total return to an index level of around six three hundred. And the thought process behind that is the US economy is growing in plation's coming down the fat is cutting rates.
Earnings are growing eleven percent in calendar twenty twenty five and another seven percent in calendar twenty twenty six, and that sets up with a valuation today of around twenty two times earnings, slight compression in the multiple, that is the building blocks to a return of the next twelve
months of roughly nine percent. So what we focused on in this report was what's the probable total return that an investor should anticipate for the cap weighted S and P five hundred index, and the conclusion was a range of somewhere between negative one percent and positive seven percent. Midpoint of that is around three percent. What is the driving force behind that thought process and that analytics, Well,
there are two issues. The first is valuation. We know when the market trades at a high multiple, a high valuation that the next ten years is typically low. Relative to an environment where say the multiple is low at.
The beginning, you tend to get a.
Pretty strong return in the subsequent the substitute decade. So we're sitting here with a cyclically adjusted pe multiple that's different from a forward one year multiple based on the cyclical adjusted earnings for the last decade of thirty eight times. That's the ninety seventh percentile versus say, the last.
One hundred years. So it's a very very expensive starting point.
And what's new about the analysis is that we also include a variable for concentration. We're in one of the most highest concentration markets in one hundred years. Top ten stocks, for example, comprise around thirty six percent of the index. It's an extremely narrow concentration, and historically when you have a high concentration market, you have a relatively muted return
in the subsequent ten years. Now, valuation and concentration are two different variables, they're not correlated, and so there's two different influences as to why we get a lower, relatively modest return. Now, what are the implications for a portfolio manager, Matt, The way you want to think.
About this is equal weighted.
The equal weighted return is likely to be probably five hundred bases points greater. So instead of three percent for an aggregate index, something like eight percent for the typical equal weighted indexes. So that's the conclusion of the report.
Well, but the concentration is in I think very many global champions, right, I mean, you have companies that dominate their spaces globally. Plus we've got a few that are likely to come on board soon. SpaceX for example, open Ai may go public in the next decade. And if I look David over the last decade, I actually stole this chart from Data Trek. As I've pointed out before, but the only time that we've had three percent returns has been when we've had catastrophic events the Great Depression,
the oil shock, the financial crisis. Do you expect something like that to come again over the next decade.
No, we're anticipating is a broadening of the market. The relative performance of the typical stock versus.
An aggregate index.
We're focusing on is a strategy for how to perform well when we deal with some of our largest institutional clients, sovereign wealth funds, pension funds, endowments, insurance companies, family offices. When they think about a ten year horizon, they think about acid allocation.
Where are the risks?
And the idea of a very concentrated market is what tends to be a risk that gets introduced. And that is the emphasis of this report, and that's the thought process, that's the analytics behind it. In the model that we build we look at rates, we look at the economic environment, we look at the offit ability in the row of companies, and so all of these variables at the index level
relative to the typical stock. That's how we get to a conclusion that it's a better strategy, a better return strategy from our perspective, with an equal way to strategy.
Well, David, I want to talk about the cross asset nature of this call too, because you say that it's likely that bonds are going to outperform in this environment. But reading through this call, I mean, if you're not calling for a recession here, I assume the Fed doesn't cut rates back to zero, wouldn't this be a call for cash. Aren't cashields going to, say, relatively high and you don't have any credit or duration risk there?
Well, I mean there's other strategies.
You can look at private credit, You could look at private equity as a potential way of diversifying a portfolio relative to right now, the idea of Treasury's tenure treasuries.
Yielding four point two percent.
So if you're at a start today and look out with our centerpiece of the central case of our forecast something like three percent. But if you look at the district, look the idea of being at the high end. There are a lot of reasons why you could be at the higher end of our range closer to seven percent.
Identified a couple of those.
You know, you typically get around three and a half percent of the constituents in the S and P five hundred turnover every year, So we look out for a decade, you're probably looking at a third of the index. There's going to be new stocks that don't exist today in the index. So there's certainly a lot of variables that could happen. The economy could be growing more rapidly, more slowly than.
A baseline forecast. Those are their issues.
AI in terms of artificial intelligence, could raise productivity. I mean lots of reasons why it could be better than our base case scenario, which is why we have a range to the upside of the down here.
You know, one thing that struck me in this note, as well as a one third chance that you have the S and P five hundred lagging inflation through twenty thirty four, what's the role of inflation here and what is the risk that it could be higher? What if the neutral rate is higher? What kind of impact would that happen on equity market returns?
Well, so you think about inflation right now, the tips break evens are around two point two percent, for example, and so based on a scenario where you have a return that could be negative one percent annualized versus positive seven percent, kind of there's a distribution around that relatively normal type distribution. The part tail of the distribution would give you a prospect of a return that's less than inflation.
That's not the base case, but it's only a is a scenario.
You know, when deal with portfolio managers, they want to think about what are the risks that are introduced into their portfolio. And the argument behind a broadening of the market is an important construct. So one of the arguments on why mid cap stocks are likely to do better than than the rest of the market in the coming year.
They have the.
Best torque to the idea of the FED cutting rates. They got twenty five percent of their balance sheet is floating rate, so you have the FED cut rates, They have less interest expense, they have higher earnings, positive rarnings, revisions, drives, equity prices, and so those are tactical issues opportunity these in the market so we think about tactics, we think
about strategy longer term. And that's the purpose of writing the report and response to questions and clients about how should we think about the perspective ten year forward returns inequities?
Right, David, we don't have a lot of time left. I know I have a question. I know that Matt has a question as well. So let me ask you this quickly. I want to get existential about the business that you're in because you think back to January and actually Wall Street strategists, on average, we're expecting the S and P five hundred to rise about two percent this year.
It's up twenty three percent. And I'll flip the question to you, is it getting harder to model to forecast where the index is going to go?
Well, it is challenging because a third of the index is comprised right now of about ten stocks. That's not just tech stocks. You have some healthcare socks, Eli Lilly, You've got Berkshire, Hathaways in the top ten companies for example. Depends on the day we're looking at it could be Visa, Broadcom, different different constituents along with the big tech companies that we're all familiar with, and so it's challenging to look at the market. That's that component, and you can look
at the rest of the balance of the market. So you think about those big stocks, they trade at thirty one times earnings.
That's a two point seven percent or so earning yield.
It's a negative risk premium versus ten year treasuries. So that's a concern about valuation. And then you have the concentration item that I overlaid. Rest of the market has a positive risk premium versus bonds, and so that's one of the attractive components of why there's a broad end of the market and why we anticipate that to persist.
David, I have an election night question for you.
When you, you.
Know, get home, put on your slippers, grab a scotch and your pipe or whatever, and you settle down in that lazy boy right click on Bloomberg TV.
What are the.
What are the indexes or the assets or what are you going to be watching on election night as we hopefully get a clearer picture of who's going to occupy.
The White House in the next four years.
Well, the election is obviously quite close in terms of the polls and things like that. So I think there's a couple of things that we look at. First, is there a split Congress versus the presidency that would suggest there's certain executive actions that can be taken, whether that's respect to tariffs, whether it's respect to certain regulation aspects that the presidency he or she could implement.
Whereas if there's a sweep on.
The Democrat or the Republican side either direction, there are potential legislative aspects. So, Matt, that's sort of the first question I want to think about. The second as we think about, well, what are the impacts of potential tariffs, what would they be? Well, US companies that are selling domestically are likely to outperform US companies that export more to the rest of the world because there could be retaliatory tariffs. So that's one strategy that we might look at.
We might look at companies that have that sort of an executive authority that you might want to think about. And then we talk about that with portfolio managers, and there's baskets that we have we trade on Bloomberg with clients based on those two characteristics.
All right, so it sounds like you have a lot to keep an eye on we all do, and we really appreciate you taking the time today to walk through that call heard around the world that is gold min Sachs, chief US equity strategist