Market veteran Ed Yardeni has stated that Goldman Sachs' prediction of low returns over the next decade is overly conservative. Earlier this week, Goldman Sachs released its 10-year outlook for the stock market, suggesting that the average annual return for the S&P 500 index will be a mere 3%, potentially ranging between -1% and 7%.
Yardeni is not satisfied with this forecast, as he has been arguing for the past two years that, due to continuous improvements in productivity, the stock market is on the verge of a boom similar to that of the 1920s. In a report this week, Yardeni said, "In our view, even Goldman's optimistic expectations may not be optimistic enough."
Yardeni argues that with the U.S. economy growing at an annual rate of 3%, coupled with an inflation rate that has dropped to around 2%, the average annualized return for the stock market over the next decade should be close to 11%. Yardeni said, "Considering the compound interest from reinvested dividends, it is hard to imagine that the future total return of the S&P 500 index will only be 3%."
Goldman Sachs' long-term bearish view on the stock market is primarily based on the fact that investors are highly concentrated in a few stocks. However, Yardeni stated that this is reasonable from a fundamental perspective. He said, "Although the information technology and communication services sectors currently account for about 40% of the total market value of the S&P 500 index, roughly the same as at the peak of the internet bubble, the fundamentals of these industry companies are much healthier than they were at that time."
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Yardeni explained that these two sectors account for more than one-third of the S&P 500 index's profitability, whereas at the peak of the internet bubble in 2000, this proportion was less than one-fourth of the index's earnings.Furthermore, the definition of technology companies has been distorted because technology is prevalent in all fields, which helps to drive productivity growth, which should support economic growth while suppressing inflation.
Overall, Yardeni believes that if the current trend continues, the stock market boom of the 1920s will extend into the next decade, which will overturn Goldman Sachs' conservative expectations.
Yardeni said: "If earnings and dividends continue to grow at a robust pace, driven by profit margins improved by productivity growth led by technology, the U.S. stock market is unlikely to experience an upcoming 'lost decade'."
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