Goldman Sachs has stunned people with a bearish outlook for US Stocks. They think that over the next decade, US Stocks will underperform government bonds. In this video, we'll look at why they came up with this shocking forecast, who agrees with them, the counterargument, and what to do if you do agree with them. I'll finish by giving you my view. This video is sponsored by Trading 212, a UK commission-free investment platform. Let's begin with that controversial forecast from Goldman Sachs. Based on a statistical model of US Stock returns, they think that the S&P 500 will generate a 3% return, a little bit over 3.1% over the next decade, compared with a group of 21 investment Banks and asset managers whose forecast averages 6%. Goldman's forecast is very low indeed. This number comes as a shock as I make this video because for the last decade, from 2014 to 2024, the S&P 500 has generated a 133% Total return. When you annualize the percentage, and that's above the 11% per

year that we've seen since 1930, so it's been a very good run. So, if we look at every 10-year rolling return for the S&P 500 over the last century, that's what you can see in this graph. You can also see the Goldman forecast in green, and you can also see the distribution for the other forecasters in dark blue. Notice how both the other forecasters and Goldman have revised down their forecast based on the very high valuation of US Stocks. So, it's not just Goldman that's bearish here, it's just the degree of bearishness which varies between Goldman and its peers. Goldman's revised down its forecast by three quarters compared to the average, whereas other forecasters have shared the average return for the S&P. So, where does all this bearishness come from? Well, it's based on Goldman Sachs's model, which has five inputs. Several of those inputs are close to their most extreme values over the last century. For example, the US market is concentrated in the shares of a handful of huge

companies. The Magnificent 7 return on equity, a measure of efficiency for profit generation, is also as high as it's ever been, and largely as a result of the expens. Magnificent Seven stocks' valuation is close to a record high, but it's not all negative, as a US economy is strong and interest rates aren't particularly high compared to the last century. But concentration is the greatest problem, according to Goldman. The 10 largest stocks make up a third of the S&P 500. That's the highest top 10 concentration since at least 1980. Goldman's model uses this concentration measure, which is the market cap of the largest stock, currently Apple, relative to the 75th percentile stock. So if you rank all of the stocks in the S&P 500 from largest to smallest, it'll be the size of Apple's market cap relative to the 75th percentile stock. Now this measure shows exceptional concentration. Their forecast would be a huge 4 percentage points greater, i.e., 7% per year rather than 3% for the S&P if

they'd exclude this variable for market concentration, and that's because this concentration variable ranks near the highest level in a century. Now, this isn't like 2000 when we had a lot of concentration in unprofitable tech stocks. The Magnificent 7 are hugely successful and profitable companies with rapid earnings growth and high margins. History shows, however, that maintaining blistering rates of sales growth for a decade is extremely unlikely. For example, if you look at companies that generate 20% sales growth or greater, that's certainly possible, but only one in 10 companies in the S&P manages that consecutively for 5 years or longer. Similarly, keeping margins above 50% for several years is very unlikely as competition inevitably eats away profitability and pricing power. The upshot is that unless new companies become magnificent, this is going to be a problem for the overpriced US stock leaders as earnings disappointment or antitrust legislation may end their bull run. Let's not forget valuation. You've probably seen me use these graphs before.

which plot the cape measure Robert Schiller cyclically adjusted price to earnings ratio and that looks at the price of the S&P 500 relative to the profits generated by the companies in the index over the previous decade. It's a very good bubble indicator. Currently, the US Stock Market, by almost any measure, is looking expensive. Cape is no exception with a 38 times multiple. So if we read across to forward returns, this suggests an easily 4% return over the following decade. And so we come to the controversial comparison with US treasuries. According to Goldman's model, the chance of US Stocks underperforming US treasuries is about 34. Goldman says that boring old Treasury will outperform the most successful stock market in the world over the last decade at least. There's even a high probability, one in three, that the S&P 500 will have negative real returns over the following decade. So investing in stocks would make you poorer. Now if we exclude concentration as one of the inputs to the model, those probabilities would be far lower. So the chance of

underperforming treasuries would be just 7% instead of 3/4, and the chance for no real return would fall from a third to just 1%. So, the real clincher for Goldman, at least, is concentration. Now, in a moment, we'll see that it isn't just Goldman who has a bearish outlook. Today's video is sponsored by Trading 212, a UK commission-free investment platform, which I've been using for some time for my fund portfolio. For example, I've got a UK small-cap portfolio with 12 stocks in it, which I have as a pie. That means that I can rebalance that portfolio, my pie, with just one click. Also, I could autofund it, so it encourages regular investing. And if I wanted to, I could copy other people's pies or publish my pies so that you can see what I'm doing. You can also copy pies created by professional fund managers. But just because it's low fee doesn't mean it's not innovative, far from it. Trading 212 Invest, for example,

is a multicurrency account that allows you to hold money and trade in multiple currencies. This means you no longer have to convert money and incur FX fees every time you trade in a different currency. There's also the 245 trading feature, and that means you can trade the US Stocks available on trading 212 anytime you like. It includes four trading sessions: pre-market, regular hours, after hours, and overnight. And of course, you can still use fractional shares, and the trading is commission-free. Now, if viewers of Pension Craft have a special offer from Trading 212, you can claim free fractional shares worth up to £100. Just open an account, verify it, fund it, and then use my name as the promo code, which is Romen RM, and you'll find a link to that offer in the description below. Now, let's see what Vanguard has to say about this. And Vanguard too produces 10-year forecasts, and they also say that US equities will perform poorly, albeit not quite as poorly as Goldman. 3% would be

at Vanguard's lower forecast range. So, to quote from a Vanguard report, they said in the second quarter, We saw a continuation of the story of lower long-term expected returns in the US equity market due to high equity valuations within it and reasonable expected returns outside the United States. Our expected returns for stocks and bonds over the next 10 years are very close. The premium for taking equity risk is very narrow. Vanguard's models suggest that in the UK, where economic data are sort of okay but valuations are relatively low, it's a very unloved market, have better upside with return forecast ranging from 5.2% to 7.2% over the coming decade. But here too, bond returns look reasonable, although significantly lower than for UK domestic stocks. However, there are dissenting voices. So, what is the counterargument? So, here's Ed Yardeni. I often use his graphs. Thanks, Ed. And he argues that returns could be closer to 11%. Why is he so optimistic? Well, it's based on the US.

economy. He thinks it's going to grow at 3%, which is okay for the US, a developed market. And also, we've seen inflation fall to much more reasonable levels. He expects it's going to carry on at 2%. He also points out that even the compounding of reinvested dividends would make 3% as a forecast for US stocks unlikely. Yardi's argument focuses on concentration in tech stocks, and he thinks that's justified given their strong fundamentals. And he points out that it's not like the dot-com bubble; these are very productive companies. Productivity is, in fact, rising over time rather than declining, and that's driven by technological advancements. So if we look at the composition of the S&P 500 right now, there's a lot of concentration in those high-productivity IT companies and communication services companies. They now make up a third combined of the S&P 500's earning power, whereas if we compare that with the era, they only made up a quarter of the S&P 500's earning

power so Yardi's overall forecast is incredibly bullish. He thinks this is going to be the Roaring 20s, and he thinks that's going to be driven by technology-led productivity growth and really solid earnings and dividend growth in those sectors. So, let's say you don't agree with Ed Yardeni, and instead, you side with Goldman Sachs. What can you do about it? Well, one suggestion from Goldman Sachs is that it may make sense to switch your US allocation towards small caps with an equal-weighted S&P 500 Index tracker. Now, these have underperformed US large caps for about a decade, and Goldman says that an evening out of performance would mean a massive 8 percentage points of outperformance for an equal-weighted S&P 500 Index tracker, and that's relative to a market cap-weighted S&P index tracker. Incidentally, I have made a video about that called Equal Weight S&P 500: The Smart Investor's Choice? with a link in the description. Alternatively, you could hold both a market cap-weighted S&P tracker.

alongside a small-cap index tracker for the US. You can see several of those here alongside me, and this is from just ETF. Personally, I've gone for the one at the top in my fund portfolio because it tracks the S&P 600 index, and that filters for quality. For example, it excludes unprofitable companies, and of course, it also has a very low expense ratio. Alternatively, you could split your geographic exposure according to region. So instead of just one global index fund, you have one for the US, Europe, Japan, EM. The overall fee for those funds would be very low, around nine basis points, 0.09%, and it gives you the flexibility to dial down your US allocation if you think it'll underperform. All I'd say is don't dial it down too much. Betting against the US is usually a bad idea. And then finally, you could just risk your portfolio. So take money out of your global index funds, say, and put them into government bonds or maybe money market funds, and then hope that a correction happens and you can buy back in at a

lower price. However, this is usually a mistake because if you have time out of the market, the equity market usually leads to underperformance. Finally, what do I think? Well, firstly, it's hard to argue with Goldman's data. Valuations in the US are very high again, and it is a very concentrated market historically. Now, it's possible that AI will be completely transformative and allow huge earnings growth, and that this is just the beginning of that transformation. However, we've heard that so many times before, and it's always been wrong in the past. Eventually, these trends implode. So, I'm certainly considering adjusting my core portfolio to tilt away from the expensive Mega cap US tech stocks, but at the moment, I'm not convinced enough to complicate my One Fund allocation. Simplicity giving it up comes with a huge price. Now, don't forget our offer from Trading 212 to claim free fractional shares worth up to £100. Open an account, verify it, fund it, and use my name as the promo code Ramen R-A-M-I-N.

and you'll find a link to that offer in the description below. And as always, thank you for listening.

Ditch Stocks for Bonds: What's Behind Goldman's Forecast?

My name is Ramin Nakisa and I started PensionCraft in 2016 as I felt strongly that I wanted to teach people how to invest well for themselves so they could stop making costly mistakes and losing their money through having to pay unnecessarily high fees.

Before starting PensionCraft, I worked in investment banking as a strategist and I was a frequent contributor on CNBC and Bloomberg TV. I have written two books about finance and investment: one for professional investors and one that explains how to buy and sell volatility using exchange-traded products.

I publish a new video on YouTube every Saturday and you can join me for a live Q&A on the 1st Thursday of every month at 7pm UK time.

If you want to learn how to become a better investor then why not join our friendly membership at pensioncraft.com?


Ditch Stocks for Bonds: What's Behind Goldman's Forecast?

Scripts