Wall Street’s major investment banks have issued cautious forecasts for the S&P 500’s performance over the next decade. In October, Goldman Sachs projected a modest 3% average annual return for the index, falling short of current 10-year Treasury yields. JPMorgan estimated a slightly higher 5.7% annualized return, while Bank of America forecasted only 1-2% annually, although dividends might add some upside.
These unusually subdued outlooks from major banks have captured investors’ attention. Lance Roberts, chief investment strategist at RIA Advisors, received numerous questions on these forecasts and addressed them in a note on October 25, concluding that the banks’ predictions are likely correct.
Roberts explained that current high valuations suggest lower returns ahead. “The S&P 500’s cyclically adjusted price-to-earnings (CAPE) ratio remains well above historical averages,” he noted, adding that elevated valuations signal both optimism and potential caution. If the market is pricing in perfection, any economic disappointment could trigger notable corrections. He advised investors not to fall into a recency bias, warning that strong recent returns do not guarantee similar performance in the next decade. Factors like more conservative central banks and potential inflationary pressures may further dampen returns compared to the past 15 years.
Roberts clarified that these muted returns are mainly relevant to new buyers rather than long-term holders. He reminded investors that such return forecasts are averages, with fluctuations likely. Though it’s uncertain when or what might trigger a downturn, he emphasized the likelihood of cyclical market corrections. While inflation has recently eased and unemployment remains stable, October’s payroll report showed weak job growth, partially due to strikes and hurricanes. Despite signs of a softening labor market, the Fed is expected to implement further rate cuts to support the economy and stave off a recession.
Roberts concluded that market cycles are inevitable: “While artificial interventions can delay the cycles, the reversion will eventually come,” he said. He underscored that to benefit from future bull markets, investors must also weather the eventual declines.