Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: And this week you might remember, Goldman Sachs came out
Speaker 2: with a note saying that the streak of blockbuster gains
Speaker 2: for the SMP five hundred it might be over. And
Speaker 2: they say that we will only see around annual gains
Speaker 2: around three percent over the next decade compared to the
Speaker 2: average thirteen percent over the past decade. And we are
Speaker 2: joined now by Goldman Sachs chief US equity strategist David Costin,
Speaker 2: who led that call. He joins us. Now when you
Speaker 2: think about this call, very controversial, David, and so I
Speaker 2: am very curious about kind of what the caveat is here.
Speaker 2: Is there kind of any upside that could be squeezed
Speaker 2: out of the equity market that is outside of this
Speaker 2: base case.
Speaker 3: So let's talk about the base case for the next year,
Speaker 3: and then we'll look at the base case for the
Speaker 3: following nine years for full year decade of performance. So
Speaker 3: the next year, we're looking at the S and P
Speaker 3: five hundred rising around eight percent nine percent total return
Speaker 3: to an index level of around six three hundred. And
Speaker 3: the thought process behind that is the US economy is
Speaker 3: growing in plation's coming down the fat is cutting rates.
Speaker 3: Earnings are growing eleven percent in calendar twenty twenty five
Speaker 3: and another seven percent in calendar twenty twenty six, and
Speaker 3: that sets up with a valuation today of around twenty
Speaker 3: two times earnings, slight compression in the multiple, that is
Speaker 3: the building blocks to a return of the next twelve
Speaker 3: months of roughly nine percent. So what we focused on
Speaker 3: in this report was what's the probable total return that
Speaker 3: an investor should anticipate for the cap weighted S and
Speaker 3: P five hundred index, and the conclusion was a range
Speaker 3: of somewhere between negative one percent and positive seven percent.
Speaker 3: Midpoint of that is around three percent. What is the
Speaker 3: driving force behind that thought process and that analytics, Well,
Speaker 3: there are two issues. The first is valuation. We know
Speaker 3: when the market trades at a high multiple, a high
Speaker 3: valuation that the next ten years is typically low. Relative
Speaker 3: to an environment where say the multiple is low at.
Speaker 4: The beginning, you tend to get a.
Speaker 3: Pretty strong return in the subsequent the substitute decade. So
Speaker 3: we're sitting here with a cyclically adjusted pe multiple that's
Speaker 3: different from a forward one year multiple based on the
Speaker 3: cyclical adjusted earnings for the last decade of thirty eight times.
Speaker 3: That's the ninety seventh percentile versus say, the last.
Speaker 4: One hundred years. So it's a very very expensive starting point.
Speaker 3: And what's new about the analysis is that we also
Speaker 3: include a variable for concentration. We're in one of the
Speaker 3: most highest concentration markets in one hundred years. Top ten stocks,
Speaker 3: for example, comprise around thirty six percent of the index.
Speaker 3: It's an extremely narrow concentration, and historically when you have
Speaker 3: a high concentration market, you have a relatively muted return
Speaker 3: in the subsequent ten years. Now, valuation and concentration are
Speaker 3: two different variables, they're not correlated, and so there's two
Speaker 3: different influences as to why we get a lower, relatively
Speaker 3: modest return. Now, what are the implications for a portfolio manager, Matt,
Speaker 3: The way you want to think.
Speaker 4: About this is equal weighted.
Speaker 3: The equal weighted return is likely to be probably five
Speaker 3: hundred bases points greater. So instead of three percent for
Speaker 3: an aggregate index, something like eight percent for the typical
Speaker 3: equal weighted indexes. So that's the conclusion of the report.
Speaker 5: Well, but the concentration is in I think very many
Speaker 5: global champions, right, I mean, you have companies that dominate
Speaker 5: their spaces globally. Plus we've got a few that are
Speaker 5: likely to come on board soon. SpaceX for example, open
Speaker 5: Ai may go public in the next decade. And if
Speaker 5: I look David over the last decade, I actually stole
Speaker 5: this chart from Data Trek. As I've pointed out before,
Speaker 5: but the only time that we've had three percent returns
Speaker 5: has been when we've had catastrophic events the Great Depression,
Speaker 5: the oil shock, the financial crisis. Do you expect something
Speaker 5: like that to come again over the next decade.
Speaker 3: No, we're anticipating is a broadening of the market. The
Speaker 3: relative performance of the typical stock versus.
Speaker 4: An aggregate index.
Speaker 3: We're focusing on is a strategy for how to perform
Speaker 3: well when we deal with some of our largest institutional clients,
Speaker 3: sovereign wealth funds, pension funds, endowments, insurance companies, family offices.
Speaker 3: When they think about a ten year horizon, they think
Speaker 3: about acid allocation.
Speaker 4: Where are the risks?
Speaker 3: And the idea of a very concentrated market is what
Speaker 3: tends to be a risk that gets introduced. And that
Speaker 3: is the emphasis of this report, and that's the thought process,
Speaker 3: that's the analytics behind it. In the model that we
Speaker 3: build we look at rates, we look at the economic environment,
Speaker 3: we look at the offit ability in the row of companies,
Speaker 3: and so all of these variables at the index level
Speaker 3: relative to the typical stock. That's how we get to
Speaker 3: a conclusion that it's a better strategy, a better return
Speaker 3: strategy from our perspective, with an equal way to strategy.
Speaker 1: Well, David, I want to talk about the cross asset
Speaker 1: nature of this call too, because you say that it's
Speaker 1: likely that bonds are going to outperform in this environment.
Speaker 1: But reading through this call, I mean, if you're not
Speaker 1: calling for a recession here, I assume the Fed doesn't
Speaker 1: cut rates back to zero, wouldn't this be a call
Speaker 1: for cash. Aren't cashields going to, say, relatively high and
Speaker 1: you don't have any credit or duration risk there?
Speaker 4: Well, I mean there's other strategies.
Speaker 3: You can look at private credit, You could look at
Speaker 3: private equity as a potential way of diversifying a portfolio
Speaker 3: relative to right now, the idea of Treasury's tenure treasuries.
Speaker 4: Yielding four point two percent.
Speaker 3: So if you're at a start today and look out
Speaker 3: with our centerpiece of the central case of our forecast
Speaker 3: something like three percent. But if you look at the district,
Speaker 3: look the idea of being at the high end. There
Speaker 3: are a lot of reasons why you could be at
Speaker 3: the higher end of our range closer to seven percent.
Speaker 4: Identified a couple of those.
Speaker 3: You know, you typically get around three and a half
Speaker 3: percent of the constituents in the S and P five
Speaker 3: hundred turnover every year, So we look out for a decade,
Speaker 3: you're probably looking at a third of the index. There's
Speaker 3: going to be new stocks that don't exist today in
Speaker 3: the index. So there's certainly a lot of variables that
Speaker 3: could happen. The economy could be growing more rapidly, more
Speaker 3: slowly than.
Speaker 4: A baseline forecast. Those are their issues.
Speaker 3: AI in terms of artificial intelligence, could raise productivity. I
Speaker 3: mean lots of reasons why it could be better than
Speaker 3: our base case scenario, which is why we have a
Speaker 3: range to the upside of the down here.
Speaker 2: You know, one thing that struck me in this note,
Speaker 2: as well as a one third chance that you have
Speaker 2: the S and P five hundred lagging inflation through twenty
Speaker 2: thirty four, what's the role of inflation here and what
Speaker 2: is the risk that it could be higher? What if
Speaker 2: the neutral rate is higher? What kind of impact would
Speaker 2: that happen on equity market returns?
Speaker 3: Well, so you think about inflation right now, the tips
Speaker 3: break evens are around two point two percent, for example,
Speaker 3: and so based on a scenario where you have a
Speaker 3: return that could be negative one percent annualized versus positive
Speaker 3: seven percent, kind of there's a distribution around that relatively
Speaker 3: normal type distribution. The part tail of the distribution would
Speaker 3: give you a prospect of a return that's less than inflation.
Speaker 4: That's not the base case, but it's only a is
Speaker 4: a scenario.
Speaker 3: You know, when deal with portfolio managers, they want to
Speaker 3: think about what are the risks that are introduced into
Speaker 3: their portfolio. And the argument behind a broadening of the
Speaker 3: market is an important construct. So one of the arguments
Speaker 3: on why mid cap stocks are likely to do better
Speaker 3: than than the rest of the market in the coming year.
Speaker 4: They have the.
Speaker 3: Best torque to the idea of the FED cutting rates.
Speaker 3: They got twenty five percent of their balance sheet is
Speaker 3: floating rate, so you have the FED cut rates, They
Speaker 3: have less interest expense, they have higher earnings, positive rarnings, revisions, drives,
Speaker 3: equity prices, and so those are tactical issues opportunity these
Speaker 3: in the market so we think about tactics, we think
Speaker 3: about strategy longer term. And that's the purpose of writing
Speaker 3: the report and response to questions and clients about how
Speaker 3: should we think about the perspective ten year forward returns inequities?
Speaker 1: Right, David, we don't have a lot of time left.
Speaker 1: I know I have a question. I know that Matt
Speaker 1: has a question as well. So let me ask you
Speaker 1: this quickly. I want to get existential about the business
Speaker 1: that you're in because you think back to January and
Speaker 1: actually Wall Street strategists, on average, we're expecting the S
Speaker 1: and P five hundred to rise about two percent this year.
Speaker 1: It's up twenty three percent. And I'll flip the question
Speaker 1: to you, is it getting harder to model to forecast
Speaker 1: where the index is going to go?
Speaker 3: Well, it is challenging because a third of the index
Speaker 3: is comprised right now of about ten stocks. That's not
Speaker 3: just tech stocks. You have some healthcare socks, Eli Lilly,
Speaker 3: You've got Berkshire, Hathaways in the top ten companies for example.
Speaker 3: Depends on the day we're looking at it could be Visa, Broadcom,
Speaker 3: different different constituents along with the big tech companies that
Speaker 3: we're all familiar with, and so it's challenging to look
Speaker 3: at the market. That's that component, and you can look
Speaker 3: at the rest of the balance of the market. So
Speaker 3: you think about those big stocks, they trade at thirty
Speaker 3: one times earnings.
Speaker 4: That's a two point seven percent or so earning yield.
Speaker 3: It's a negative risk premium versus ten year treasuries. So
Speaker 3: that's a concern about valuation. And then you have the
Speaker 3: concentration item that I overlaid. Rest of the market has
Speaker 3: a positive risk premium versus bonds, and so that's one
Speaker 3: of the attractive components of why there's a broad end
Speaker 3: of the market and why we anticipate that to persist.
Speaker 5: David, I have an election night question for you.
Speaker 4: When you, you.
Speaker 5: Know, get home, put on your slippers, grab a scotch
Speaker 5: and your pipe or whatever, and you settle down in
Speaker 5: that lazy boy right click on Bloomberg TV.
Speaker 4: What are the.
Speaker 5: What are the indexes or the assets or what are
Speaker 5: you going to be watching on election night as we
Speaker 5: hopefully get a clearer picture of who's going to occupy.
Speaker 4: The White House in the next four years.
Speaker 3: Well, the election is obviously quite close in terms of
Speaker 3: the polls and things like that. So I think there's
Speaker 3: a couple of things that we look at. First, is
Speaker 3: there a split Congress versus the presidency that would suggest
Speaker 3: there's certain executive actions that can be taken, whether that's
Speaker 3: respect to tariffs, whether it's respect to certain regulation aspects
Speaker 3: that the presidency he or she could implement.
Speaker 4: Whereas if there's a sweep on.
Speaker 3: The Democrat or the Republican side either direction, there are
Speaker 3: potential legislative aspects. So, Matt, that's sort of the first
Speaker 3: question I want to think about. The second as we
Speaker 3: think about, well, what are the impacts of potential tariffs,
Speaker 3: what would they be? Well, US companies that are selling
Speaker 3: domestically are likely to outperform US companies that export more
Speaker 3: to the rest of the world because there could be
Speaker 3: retaliatory tariffs. So that's one strategy that we might look at.
Speaker 3: We might look at companies that have that sort of
Speaker 3: an executive authority that you might want to think about.
Speaker 3: And then we talk about that with portfolio managers, and
Speaker 3: there's baskets that we have we trade on Bloomberg with
Speaker 3: clients based on those two characteristics.
Speaker 1: All right, so it sounds like you have a lot
Speaker 1: to keep an eye on we all do, and we
Speaker 1: really appreciate you taking the time today to walk through
Speaker 1: that call heard around the world that is gold min Sachs,
Speaker 1: chief US equity strategist