Rudolph Angler Wall Street’s recent forecasts on the S&P 500 have been notably subdued, with some of the biggest banks signaling lower-than-usual returns over the coming decade. Goldman Sachs, for instance, projected in October that the S&P 500 will yield just a 3% annual average return over the next 10 years, trailing behind current 10-year Treasury yields. JPMorgan offered a slightly higher estimate of 5.7%, while Bank of America expects 1-2% annual returns, though dividends could add a significant boost.
The unusual bearishness from these institutions caught investors’ attention. Lance Roberts, chief investment strategist at RIA Advisors, noted he received multiple inquiries about these forecasts and decided to analyze the claims in an October 25 note. His verdict? The banks’ cautious outlook is likely on target.
Roberts explained that, given current valuations, muted average returns for the next decade are mathematically probable. The Shiller CAPE ratio—a 10-year average of price-to-earnings ratios—indicates that the S&P 500’s valuations are significantly above historical averages, which may reflect optimism but also serve as a warning sign. “If the market is pricing in perfection, any disappointment could lead to substantial corrections,” Roberts noted.
He cautioned against relying too heavily on recent strong returns, reminding investors that current elevated valuations and less dovish central banks could spell lower returns compared to the past 15 years. Rising inflation risks are also a concern. However, Roberts pointed out that his warning is more relevant to new investors than to those who have held stocks for years and plan to maintain their positions long-term.
Roberts also reminded investors that these forecasts are based on averages, so individual years will likely vary. While October payroll data showed weak job growth—likely influenced by factors like recent strikes and hurricanes—overall inflation has cooled, and the unemployment rate remains steady at just above 4%. Labor economist Sam Kuhn advised caution in interpreting these figures, acknowledging that disruptions affected the recent report.
Despite these concerns, the S&P 500 rose 0.4% on Friday, sitting 2.3% below its all-time high of 5,728. Signs of strain in the labor market are emerging, including revised payrolls and reduced job openings. To counter a potential downturn, the Federal Reserve may issue rate cuts to encourage economic growth and stave off recession.
Roberts concluded by reminding investors that while bull markets will inevitably return, they will be accompanied by eventual downturns. “No one can repeal market and economic cycles,” Roberts said. “While interventions can stretch and delay them, reversion is always on the horizon.”