While American stocks have been the darlings of investors for years, Goldman Sachs is now suggesting it might be time to look beyond U.S. borders for better returns.
The investment bank forecasts that U.S. stocks will deliver only about 6.5% annual returns over the next decade. This represents a significant drop from the historical average of 10% and marks the lowest expected returns among global regions.
Think of it like your favorite restaurant suddenly raising prices while the food quality stays the same – you might want to explore other dining options.
Goldman Sachs points to emerging markets as the new stars of the show, expecting them to deliver impressive 10.9% annual returns. Asian markets excluding Japan could return around 10.3%, while Japan and Europe are forecast to provide 8.2% and 7.1% respectively.
Even Europe is expected to outperform the U.S., which would be quite a role reversal.
The main culprit behind America’s dim outlook is sky-high valuations. U.S. stocks are trading at a forward price-to-earnings ratio near 23, which is over 50% higher than global peers. This means investors are paying premium prices for American companies, similar to buying designer jeans when regular ones work just as well.
Market concentration adds another layer of concern. A handful of mega-cap technology stocks dominate the gains, creating a situation where the market’s fate rests on very few companies.
This concentration has reached 100-year highs, making the market vulnerable if these giants stumble. For conservative investors seeking stability, dividend-paying stocks in sectors like healthcare and consumer goods may offer better risk-adjusted returns during this challenging period. Diversification across different asset classes remains crucial to protect against these concentrated market risks.
Goldman Sachs estimates that U.S. earnings will grow about 6% annually, but rising valuations are expected to decline roughly 1% per year. This creates a headwind that could drag down overall returns. Despite current strong corporate performance with profit margins reaching 13.1% in the third quarter, future profit growth is unlikely to be significant given that margins are already near record highs.
Perhaps most striking is Goldman’s calculation that U.S. stocks have a 72% probability of underperforming bonds over the next decade. This contrasts sharply with recent years when stocks returned about 13% annually.
The firm recommends diversifying globally, particularly into emerging markets like China and India, where stronger economic growth and reforms could drive superior returns.
