Goldman Sachs warns: U.S. stock returns may average just 6.5% annually over the next decade, the lowest globally, while emerging markets may take the lead.

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After a decade of remarkable bull market performance, the dominance of U.S. stocks is facing serious challenges. Goldman Sachs strategists have issued a warning, expecting that in the next ten years, U.S. stocks will underperform other major global markets, while emerging markets will lead the world with robust earnings growth.

On November 12, Peter Oppenheimer, Goldman Sachs’ Chief Global Equity Strategist, and his team stated that excessive valuations of U.S. stocks will limit future returns. The team forecasts that the S&P 500 will deliver an annualized return of only 6.5% over the next decade, whereas emerging markets are expected to achieve an annualized return of 10.9%.

High Valuations Drag Down U.S. Stock Market Outlook

The core reason for Goldman Sachs' cautious stance on U.S. stocks is persistently high valuations and unsustainable earnings growth. The report reveals that the S&P 500's forward price-to-earnings ratio has surged to 23 times, equivalent to the peak during the Internet bubble. Currently, the valuation premium of U.S. stocks versus their global peers exceeds 50%.

Peter Oppenheimer’s team believes that the key factors which drove the surge of U.S. stocks over the past decade—including persistent profit margin expansion, declining tax rates, and a low interest rate environment—will be hard to replicate in the next ten years. The fading of these structural advantages will significantly constrain the future performance of U.S. stocks.

Goldman Sachs’ long-term pessimistic outlook for U.S. stocks has already begun to show in this year’s market performance. Despite the continuing boom in tech and artificial intelligence, the S&P 500’s 16% year-to-date gain is clearly lagging behind the MSCI World (excluding U.S.) Index’s strong 27% growth.

As early as the beginning of last year, Peter Oppenheimer had already warned of the excessive valuations of U.S. stocks and advised investors to shift funds toward international markets.

Emerging Markets Take the Lead, Asia Shines

Goldman Sachs suggests that investors should increase allocations to markets outside the U.S., with particular emphasis on emerging markets. The report highlights:

"We expect that higher nominal GDP growth and structural reforms will benefit emerging markets, while the long-term gains from artificial intelligence should be broadly based and not limited to U.S. technology companies."

Specifically, Goldman Sachs is especially optimistic about the prospects of emerging markets and the Asian region. Among them, China and India are highly anticipated to become the main engines driving earnings growth in emerging markets. With both profit improvement and policy reforms, the Japanese market is expected to achieve an annualized return of 8.2%, while the European market is forecast at 7.1%.

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