Goldman Sachs said last week that as investors turn to other assets, including bonds, for better returns, US stocks are unlikely to maintain their performance above the average level of the past decade. Analysts such as David Kostin from Goldman Sachs predict that the annualized nominal total return of the S&P 500 index in the next decade will be slightly above 3%, compared to 13% in the past decade and an average level of 11% in the long term.

However, Goldman Sachs's forecast has been questioned by many Wall Street professionals. Analyst​s at JPMorgan expect that despite a possible decrease in pe, large cap stocks in the US will still be the cornerstone of investors' portfolios, with an expected annualized ​roi of 6.7% over the next 10-15 years. The Global Head of JPMorgan Asset Management said that despite a potential decrease in pe, healthier macro and corporate fundamentals will provide investors with more stable capital allocation opportunities. Much of JPMorgan's team's optimism stems from their expectations of income growth and margin improvement brought about by ai, especially for large companies that invest heavily in the technology.

Expectations for increased productivity, strong profit margins, and healthy profit growth have been hot topics recently. Ed Yardeni, the founder of Yardeni Research and a veteran of Wall Street, also predicts that these trends will drive US stocks higher in the coming years. Ed Yardeni has been advocating for a stock market prosperity similar to the Roaring Twenties for the past two years, citing sustained productivity growth. He notes that with the US economy growing at a rate of 3% per year and inflation moderating to around 2%, the average annual return on the stock market over the next ten years should be close to 11%.

Ed Yardeni said," It is difficult to imagine that the future total return on the S&P 500 Index will only be 3%. When looking at the compounding of reinvested dividends alone, the return is much higher than this." If the current trend continues, he sees a scenario where the stock market prosperity of the Roaring Twenties will extend to the next decade, overturning Goldman Sachs's conservative view. "If earnings and dividends continue to grow steadily, and profit margins improve due to technologically-led productivity growth, the likelihood of an upcoming Lost Decade for the US stock market is slim."

Nicholas Colas, co-founder of Datatrek Research, is encouraged by the current state and future trends of the US stock market. He stated," The next decade for the S&P 500 Index will be filled with world-class, profitable companies, with more companies waiting to go public. Valuations reflect this, but they cannot predict what the future holds." He added," Over the next ten years, the return rate of the S&P 500 Index will reach at least the long-term average of 10.6%, and possibly even higher."

Nicholas Colas pointed out that cases where the historical return rate of the S&P 500 Index was less than 3%"always have very specific catalysts to explain these below-average returns", such as the Great Depression, the 1970s oil crisis and its subsequent impacts, and the global financial crisis are all related to these low-decade return rates." He said, "Historically, only when very, very bad things happen, will the return rate reach 3% or lower." "While we rely on media reports of Goldman Sachs research, we have not read any summaries of the crises envisioned by their researchers. Without those, their conclusions are difficult to align with nearly a century of historical data."

Ritholtz Wealth Management co-founder Barry Ritholtz stated: "It is unlikely to predict various economic disasters that will happen in the next 10 years. It is difficult to imagine any decade without some sort of economic catastrophe. However, this is a completely different discussion from a 3% annual return over ten years."

In fact, accurately predicting what will happen in the next ten years is very difficult, as Goldman Sachs also emphasized in their report. At the same time, as Ed Yardeni and Nicholas Colas pointed out, there are good reasons for predicting both low and high returns.

USA Macro Economy

Last week, several macroeconomic data points indicated that the US economy still has resilience, including stable credit card spending data, a decrease in initial jobless claims, improved consumer sentiment, among others. However, existing home sales declined, mortgage rates rose slightly, and offices remain relatively empty. In addition, the 2024 fourth quarter CEO Confidence Index of the Business Roundtable showed cooling optimism. The chief economist of the Business Roundtable, Dana Peterson, stated: "CEOs' optimism continued to wane in the fourth quarter as leaders of large companies are less confident about the future of their industries. Views on the overall economy – whether now or in the next six months – have not changed significantly compared to the third quarter. However, CEOs' assessments of the current state of their industries have declined."

There are some noteworthy data points. US business investment activity is on the rise, with September non-defense capital goods orders excluding aircraft (core capital expenditures or business investments) increasing by 0.5% to a record $74.05 billion. Core capital expenditure orders are a leading indicator, foreshadowing future economic activity. While the growth rate has stabilized, they will continue to show strong economic momentum in the coming months. Most states in the US are still growing; recent GDP growth expectations remain positive, with the Atlanta Federal Reserve Bank's GDPNow model indicating a 3.3% actual GDP growth rate for the third quarter.

When these are combined, it can be seen that the US economy still has resilience, supported by very healthy consumers and business balance sheets. Having virtually solved inflation, the Fed has shifted focus to supporting the labor market.

Although the market is in a peculiar period where hard economic data has decoupled from soft sentiment data – consumer and business confidence is relatively poor, although consumer and business activities continue to grow and are at record levels. From an investor's perspective, it is important that hard economic data continues to remain strong.

Analysts expect that the performance of the US stock market may outpace the US economy, largely thanks to positive operational leverage. Since the pandemic, companies have actively adjusted cost structures, leading to strategic layoffs and investments in new equipment, including AI-driven hardware. These actions have brought about positive operational leverage, meaning that moderate sales growth is being transformed into strong profit growth even in an economic slowdown.

Of course, there are still some risks, such as the uncertainty in US politics, geopolitical turmoil, energy price fluctuations, and others. But as of now, there is no reason to believe that, over time, the economy and markets will face insurmountable challenges. Long-term investing still remains undefeated, and long-term investors can expect this momentum to continue.

Editor/Lambor