Stocks have experienced a remarkable run over the past decade, but the future may not be quite as bright. A growing number of market analysts are cautioning that investors could be heading into a “lost decade,” where returns fall far short of the impressive gains seen over the past 15 years.
David Kostin, chief U.S. equity strategist at Goldman Sachs, reignited this discussion in a recent report. Kostin warned that the S&P 500 could be entering one of its weakest periods in the last century. His analysis echoes similar concerns raised by strategists at J.P. Morgan and GMO, as well as Apollo Global Management’s chief economist, Torsten Slok.
Slok had previously forecast that the S&P 500 might deliver annualized returns of less than 3% over the next three years based on its current valuation.
Kostin’s outlook is even more bearish, predicting that the index could see average annual returns of just 3% over the next decade—far below its performance over the past decade and the long-term average since 1928. Goldman’s analysis attributes this potential downturn to two key factors: high stock valuations and extreme market concentration.
The cyclically adjusted price-to-earnings (CAPE) ratio for the S&P 500 is currently at 38 times forward earnings, close to the peak levels seen during the dot-com bubble. But what sets the current market apart is the unprecedented level of concentration, with a few mega-cap companies dominating the index. According to Goldman, this concentration is now at its highest since the early 1930s.
This high concentration poses risks because it becomes increasingly difficult for these dominant companies to maintain their competitive edge. Without diversification, market performance could be hampered. Kostin even noted that without this level of concentration, Goldman’s forecast for returns would be four percentage points higher.
Given the current outlook, Goldman sees a strong case for Treasurys outperforming the S&P 500 in the coming decade. The equal-weighted version of the index could also outpace its cap-weighted counterpart.
However, Kostin acknowledged that factors like stronger-than-expected productivity growth or a corporate tax cut could shift the forecast. But for now, high valuations remain a cause for concern.
This isn’t the first time experts have warned of lackluster performance ahead. Ben Inker, co-head of asset allocation at GMO, recently pointed out that periods of weak returns—so-called “lost decades”—have occurred more frequently than many investors realize.
Historically, these periods often begin when both stocks and bonds are trading at rich valuations, as is the case today.
While the current environment offers reasons for optimism—strong economic growth, declining inflation, and interest rate cuts—history suggests that such favorable conditions don’t last indefinitely. As Aya Yoshioka of Wealth Enhancement noted, “There are a lot of things to like about this market, but valuations aren’t one of them.”
Despite some positive signs, both the S&P 500 and Dow Jones Industrial Average dipped recently after hitting record highs, while the Nasdaq Composite edged up, driven by gains in tech stocks.
