Goldman just put out a long-term forecast that sees 90% chance stocks beat bonds over 10 years

Published Wed, Jul 15 20208:36 AM EDT

(This story is for CNBC PRO subscribers only.) Investors should favor stocks over bonds for the next decade since there's a greater than 90% chance that equities will outperform through 2030, according to Goldman Sachs. The firm believes that the S & P 500 will return an average of 6% over the next ten years, including dividends, with the high and low forecasts coming in at 11% and 2%, respectively. "Our analysis implies an investor buying both assets today has a 90% probability of generating a superior return from stocks compared with holding a 10-year US Treasury note through its maturity in 2030," the firm said. Goldman's analysis is based on five factors: Starting absolute valuation Starting relative valuation Aggregate equity allocations Dividend yield and growth Economic modeling Goldman Sachs' chief U.S. equity strategist David Kostin said that 25% of the return over the next decade will come from dividends, with the other 75% driven by price gains. Looking at data going back to 1880, the firm found that 59% of the time 10-year returns for the S & P 500 fell between 2% and 11%, with the average return coming in at 9.2%. One exception, however, is the 10-year period through June 2020. The index posted an annual total return of 13.6%, as the economy recovered from the recession. Goldman said that this ranked in the 75th percentile of historical returns, though was far below the 21% average return in the 10 years through 1959. But coming off an especially strong period does not necessarily come at the expense of future returns. "History demonstrates that prospective 10-year returns are not highly correlated with trailing 10-year returns," the firm noted, while acknowledging that rising equity valuations does create a less attractive starting point for future investment. While the firm believes investors will be rewarded for staying long over the next 10 years, there could be bumps along the way, including in the near-term. Kostin sees the S & P 500 finishing the year at 3,000, which is 6% below where it closed on Tuesday. The index tumbled into a bear market in March at the fastest rate on record as the coronavirus pandemic brought the global economy to a virtual standstill. But since then it's staged a swift recovery. While still about 6% below its Feb. 19 all-time high of 3,393.52, the benchmark index has jumped nearly 46% since its March 23 low. One of the factors fueling Goldman's forecast is current exposure to the U.S. stock market. "The major ownership categories of US stocks (households, mutual funds, pension funds, and foreign investors) collectively account for 83% of the market," Kostin wrote. "We estimate these entities in aggregate had a 44% portfolio allocation to US equities at the end of 2Q, ranking at the historical 91st percentile. Since 1952, when equity allocations have been between 40% and 45%, the subsequent 10-year annualized return for the S & P 500 has averaged 6.5%. The forward 10-year annualized return has never been negative following equity allocations near current levels," he added. Forecasting where the S & P 500 will be at the end of the year is difficult enough, and assessing the longer-term trajectory is that much more challenging. With that in mind, Goldman identified a number of risks to its forecast, including de-globalization, potential changes to the corporate tax code, as well as index characteristics. Kostin said that the latter warrants a special mention given the rate at which the S & P 500's composition changes. "It is challenging, and arguably impossible, to forecast with accuracy the long-term return of an index when firms that may be added to the benchmark in the not-too-distant future may not yet have been founded," he wrote. "To put the S & P 500 index turnover in the context of long-term returns, consider that since we published our original forecast eight years ago, 170 new constituents have entered the index and now represent 17% of the index capitalization." Goldman last published a report of this nature in 2012, at which time the firm predicted that the S & P 500 would post an annualized return of 8% over the subsequent 10 years. The bull and bear cases forecast returns of 12% and 4%, respectively. In actuality, the index returned an average of 13.6%. - CNBC's Michael Bloom contributed reporting.

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(This story is for CNBC PRO subscribers only.)

Investors should favor stocks over bonds for the next decade since there's a greater than 90% chance that equities will outperform through 2030, according to Goldman Sachs.

The firm believes that the S&P 500 will return an average of 6% over the next ten years, including dividends, with the high and low forecasts coming in at 11% and 2%, respectively.

"Our analysis implies an investor buying both assets today has a 90% probability of generating a superior return from stocks compared with holding a 10-year US Treasury note through its maturity in 2030," the firm said.

Goldman's analysis is based on five factors: