In a notable forecast this past week, Goldman Sachs analysts have projected that the stock market may only deliver 6.5% in annualized returns through 2035. This projection has sparked discussions among market participants, particularly as it contrasts sharply with the average annual returns of closer to 10% that the S&P 500 has historically achieved. Such a forecast raises concerns regarding the sustainability of the current market rally, which has gained momentum since the lows experienced in November.
The analysts highlighted that elevated market valuations could significantly impede future returns. They pointed to the “Magnificent Seven” technology stocks, which have substantially contributed to recent market gains, suggesting that these high-performing tech names may need to pause as investors reevaluate the premium valuations attached to AI exposure, especially given that returns on current investments may not materialize in the immediate future.
For investors seeking to enhance their returns amid the predicted milder trajectory for the S&P 500, Goldman Sachs has offered several strategies.
First, to potentially capitalize on lower valuations and higher prospective returns, they recommend exploring international stocks. Many developed markets outside the U.S. have already outperformed the domestic market this year. The Schwab Fundamental International Equity ETF, for example, has outstripped the S&P 500 with a remarkable over 35% gain year to date. As the focus on valuation increases, this diversified approach to international equities appears timely and prudent.
Second, the analysts encourage investors not to overlook small- and mid-cap stocks, which can offer growth potential at more attractive valuations than their larger counterparts. While smaller companies have historically been viewed as riskier due to their volatility and profitability concerns, accessing this segment through an ETF like the iShares Core S&P Small-Cap ETF could provide exposure to profitable smaller entities that may outperform as the market environment shifts.
Finally, for those preferring a more hands-on investment approach, selecting individual stocks from cheaper segments of the U.S. market could yield better outcomes than settling for the broad index. Notably, Berkshire Hathaway has been highlighted as a preferable alternative to the S&P 500. Despite concerns about leadership transitions post-Warren Buffett, the company is still regarded as a sound investment given its substantial cash reserves and a potential for continued value-driven management under incoming CEO Greg Abel.
Overall, while Goldman Sachs’s outlook indicates a period of more subdued market performance, savvy investors may find opportunities both internationally and within the smaller-cap segments that could lead to better outcomes over the next decade.
