Goldman Sachs has been pushing the view that the stock market’s return over the next 10 years is likely to be very low, at only around 3% per year. We disagree. Admittedly, there’s logic to that forecast: The forward P/E of the S&P 500 is currently historically high at 21.8 (chart). That suggests that it’s likely to fall in the coming years, thereby reducing the upside for the S&P 500—especially if there’s another recession over the next 10 years. Past recessions have always caused both earnings and the valuation multiple to crater. In other words, the market is priced for perfection, which increases the odds of disappointing returns.
But we observe that the forward P/E was even higher than it is now on September 1, 2020, just five months after the end of the pandemic lockdown. It was 23.2 back then. Yet the S&P 500 has nearly doubled; it’s up 94% since then. That’s despite a bear market in 2022.
There were indeed “lost decades” in the stock market during the 1970s and 2000s, following historically high P/Es (chart). The first episode was associated with rapidly rising consumer prices, which led to two recessions. The second resulted from the bursting of a housing price bubble, which triggered the Great Financial Crisis and the Great Recession.
