S&P 500 (^GSPC -0.03%) It is synonymous with the US stock market. The index has returned 13 percent annually over the past decade, outperforming most other asset classes including international equities, fixed income, precious metals and real estate. However Goldman Sachs He recently shocked Wall Street with a stark warning: The S&P 500 may return just 3% annually over the next decade.

This dire prediction is based on two observations: First, the index is highly concentrated, with the Magnificent Seven accounting for one-third of its weight. Analysts find this problematic because “it is extremely difficult for any firm to maintain high levels of sales growth and profit margins over long periods of time.”

Second, the stock market’s current valuation is stratospheric by at least one measure. The S&P 500 trades at a cyclically adjusted price-to-earnings (CAPE) ratio of 38; This rate has been in the 97th percentile since 1930. This means that stocks are only 3% more expensive over the last 95 years.

In this respect, Goldman Sachs expects the next decade to be bleak for the S&P 500. However, investors need to take this warning into consideration with great care. Here’s why.

Statistically speaking, Goldman Sachs is probably wrong

Wall Street has a poor track record when it comes to predicting the future performance of the stock market. There is a 17 percentage point difference between analysts’ average year-end forecasts since 2020. S&P 500 Here’s where the index actually ends each year, according to Goldman Sachs.

Ironically, Goldman Sachs itself has contributed to this trend by consistently making incorrect predictions about the annual performance of the S&P 500, as detailed below:

• Goldman Sachs predicted in December 2019 that the S&P 500 would finish 2020 with 3,400 points. However, the index completed the year with a 10% increase at 3,756.
• Goldman Sachs predicted in December 2020 that the S&P 500 would finish 2021 at 4,300. However, the index completed the year at 4,766 with an increase of 11%.
• In December 2021, Goldman Sachs predicted that the S&P 500 would finish 2022 at 5,100 points. However, the index finished the year at 3,893, with a 24% decrease.
• In December 2022, Goldman Sachs predicted that the S&P 500 would finish 2023 at 4,000. However, the index finished the year with a 19% increase at 4,769.
• Goldman Sachs predicted in December 2023 that the S&P 500 would finish 2024 with 5,100 points. However, the index is currently 14% higher at 5,800.

Over the past five years, Goldman Sachs has been at least 10% behind target in its year-end forecasts for the S&P 500, with the median forecast being 14% too low. If analysts have difficulty predicting a single year’s performance, the probability of making an accurate forecast over a decade is statistically insignificant. Actually, Warren Buffet Stock market predictions were once referred to as “poison.”

Also while high CAPE rates Although historically associated with weak long-term returns on the S&P 500, some experts believe the metric has become less meaningful over time. The CAPE ratio, which divides price by average inflation-adjusted earnings over the last decade, is based on: generally accepted accounting principles (GAAP). But the definition of GAAP earnings has changed significantly over the years, making comparisons with past decades questionable at best.

Some Wall Street analysts disagree with Goldman Sachs

While Goldman Sachs predicts a bleak decade for the stock market, other Wall Street analysts have different expectations for the S&P 500. Tom Lee of Fundstrat Global Advisors thinks the index could reach 15,000 by 2030, which would represent a 17% annual return from its current level. 5,800. Ed Yardeni and Eric Wallerstein of Yardeni Research think the index will return 11% annually over the next decade.

More importantly, Yardeni and Wallerstein addressed concentration concerns in the stock market in a recent article. “While the information technology and communications services sectors currently make up about 40% of the overall S&P 500 (near the peak of the dot-com bubble), these are much more fundamentally sound companies.”

Indeed, in the meantime Magnificent Seven Although they make up about one-third of the S&P 500, the combined profit margins of these seven companies are three times higher than those of the other 493 companies in the S&P 500. Additionally, The Magnificent Seven is predicted to report earnings growth of 34%. The remaining 493 companies are expected to report earnings growth of 4%. JPMorgan Chase.

So, what steps should investors take in response to Goldman’s warning? Personally, I plan to do nothing. Wall Street has a poor track record with single-year forecasts, let alone multi-decade forecasts. However, nervous investors should consider buying a stock. equal weight S&P 500 index fund. Invesco S&P 500 Equal Weight ETF It is a good option.