In a recent discussion, Chief Investment Officer Mark DiOrio, CFA, analyzed a Goldman Sachs prediction that suggests the stock market may see only 3% annualized returns over the next decade. Mark expresses skepticism, noting that such forecasts often resurface with negative sentiment, which can mislead investors. He explained that these low-return scenarios are rare and short-lived, typically driven by external events. He emphasized the risk of missing market rallies by focusing too heavily on pessimistic forecasts.
He also discusses the potential of the U.S. Treasury to outperform stocks, though Mark cautioned against abandoning equities based on historical earnings growth and current valuations. Finally, Mark offered insights on the election cycle’s effect on market trends, underscoring the shift from defensive to cyclical sectors as the market enters a new phase.
Transcript:
00:00:04 - 00:00:10
Erin
Mark, it is very good to see you. I'm glad we have a chance to talk today because I want to go through recent market predictions.
Take a look at this recent prediction. This says we’re going to see just 3% annualized stock market returns over the next decade. This is according to research from Goldman Sachs. So, first question: what is your immediate reaction when you read headlines like this?
00:00:26 - 00:00:33
Mark
Well, we've seen these types of long-term predictions time and time again. I can go back to 2012, 2014, and you can pull up predictions that said the market would be flat over the next 10 years due to valuation. I’ve seen this analysis before, and I know what it says. Basically, it’s based on forward earnings yield and usually using the prior 12 months' earnings instead of looking at forward earnings, which would look better.
Anyway, just the way they do it, the analysis does suggest it could be at that level. But it's not really a prediction we would use as part of our portfolio construction process. You see these time and time again, and they always pop up with a bit of negativity, which can mislead investors into wrong conclusions about market movements.We’ve had a major market move over the last two days, almost the same amount they’re talking about on an annualized basis. I wouldn’t use it for analysis or portfolio construction. We may look at key valuation sectors and lean that way, but it’s not something we would build portfolios around.
00:01:53 - 00:02:01
Erin
I do want to drill down a bit more into that. Goldman's forecast of 3% annualized returns for the S&P over the next decade does raise concerns. How likely do you think this scenario is, considering roughly 9% of all rolling ten-year returns have been 3% or less?
00:02:11 - 00:02:17
Mark
Well, you might start with a base case saying there’s maybe a 9% chance of that. You notice it dips quickly and bounces right out, so you’re not there for long. In other words, it might hit there, but then the market turns around and rallies, leading to wrong conclusions.
These events are 30-40 years apart, usually driven by an exogenous event, and the market rallies back up. Missing that turn because of negativity is risky. We saw this in 2008 and 2009—the market bottomed, started to rally, and has continued since. Doom-and-gloom outlooks continue to affect investors, but these are very short events when they happen.
00:03:20 - 00:03:24
Erin
With Goldman Sachs estimating that US treasuries might outperform stocks over the next decade, should we revisit portfolio strategies or long-term planning?
00:03:35 - 00:03:52
Mark
I might take the opposite view, actually. Looking at treasuries now, I wouldn’t want to compare it to the high-interest rate environment of the seventies and early eighties, which led to strong bond performance. Currently, the 10-year treasury is in the 4.5% range, but average EPS growth for stocks has been 6% over the last hundred years. Shifting to treasuries would require a significant downshift in earnings growth and a valuation cut.
One of the biggest risks we discuss with advisors is not prices declining but prices rising too high, as we’ve seen in housing and stocks. You don’t want to miss out by waiting for an event that may never happen. In other words, even if 3% annual returns happen, we could have very good years followed by a bad patch, and then it rebounds. So, I don’t think you can really build a plan around that effectively.
00:05:04 - 00:05:09
Erin
We’re recording the day after the election, so with the new president decided, do you have any big-picture market predictions moving forward?
00:05:18 - 00:06:14
Mark
We don’t drive decisions based on election events but rather the election cycle. Historically, there’s an uptrend in election years, despite the headlines. Moving around the election, we shift away from defensive sectors, which have done well over the past few months, toward cyclical sectors. Small and mid-caps tend to perform best from election into the first year of the presidential cycle, which aligns with our views.
00:06:14 - 00:06:20
Erin
Mark, thank you for sharing your thoughts on these predictions and market headlines. I appreciate your time today.
Mark
Thanks, Erin.
