Is S&P 500 Expected to Underperform? ETFs in Focus

The S&P 500 has returned 93% over the past five years. The annualized return of theSPDR S&P 500 ETF Trust SPY has been 15.96% over the past five years and 13% over the last decade. Over the past decade, U.S. equities have surged since the global financial crisis in 2008, driven first by near-zero interest rates and later by optimism around robust economic growth.

However, Goldman Sachs Group Inc. strategists, including David Kostin, predict that U.S. stocks are unlikely to maintain the high returns seen over the past decade. According to them, the S&P 500 Index is projected to deliver an annualized nominal total return of just 3% over the next 10 years, a sharp contrast to the 13% return of the last decade and below the long-term average of 11%, as quoted on CNBC.

Treasury Bonds May Outperform Stocks

The Goldman team estimates a 72% chance that the S&P 500 will underperform U.S. Treasury bonds over the next decade. Furthermore, they foresee a 33% chance that the index will fail to keep up with inflation through 2034. iShares 20+ Year Treasury Bond ETF TLT, which yields 3.89% annually, and iShares 0-5 Year TIPS Bond ETF STIP, which yields 2.73% annually, should thus be kept under watch.

In their note dated Oct. 18, the strategists cautioned that investors should be prepared for significantly lower equity returns compared to historical averages. Note that much of this year's 23% rally has been focused on a few large technology companies, suggesting limited breadth in the recovery.

Broader Returns Expected Going Forward

Despite recent tech-driven gains, the strategists anticipate broadening of returns, predicting that the equal-weighted S&P 500 will outperform the market-cap-weighted benchmark over the next decade. Goldman projects the S&P 500 to deliver below-average returns of around 7%. So, it is better to bet on Invesco S&P 500 Equal Weight ETF RSP, going forward, if you want to follow Goldman Sachs’ suggestion.

Should You Ignore S&P 500 Totally?

The latest Bloomberg Markets Live Pulse survey revealed that investors expect the U.S. equity rally to extend into the final stretch of 2024. The banks and other Finance sector companies gave a good start to the Q3 earnings season.

Through Friday, Oct. 18, we have seen Q3 results from 71 S&P 500 members that collectively account for 15.6% of the index’s total market capitalization. Total earnings for these companies are up 6.3% from the same period last year on 4.8% higher revenues, with 81.7% of the companies beating EPS estimates and 67.6% beating revenue estimates.

The proportion of these 71 index members beating both EPS and revenue estimates is 60.6%. With such a start to the earnings cycle, we should not ignore S&P 500 ETFs like Vanguard S&P 500 ETF VOO and iShares Core S&P 500 ETF IVV.

The winner of the U.S. presidential election and the Fed’s forward monetary policy will also play a role in predicting the fate of the S&P 500. Even if the gains do not match that of the past decade, the expected gains should not be minuscule, given the current condition of the U.S. economy.

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