Banks on Wall Street warn: The performance of American shares will fall sharply

The U.S. stock market has had a tremendous run over the past decade, but the years ahead may not be so spectacular, according to recent views of some big Wall Street banks.

They talk about the prospect of a "lost decade", in which the performance of shares will be much lower than that seen by investors in the last ten years. What's more, stock returns are likely to underperform bonds and even underinflation, according to one of America's largest banks.

• Unsustainably high valuations and dependence of market performance on just a few stocks

JPMorgan Chase, the world's largest bank, is forecasting lower US market returns over the next decade as tech stocks "come back down," according to an article published mid-last month. , on the nasdaq.com website. The bank's analysts expect an average annual return of 5.7% for the S&P 500 over the next ten years, about half the index's 10% annual return since the end of World War II in 1945.

The bank's analysts expect an average annual return of 5.7% for the S&P 500 over the next ten years, about half the index's 10% annual return since the end of World War II in 1945.

• JPMorgan: "An aging global population may drive equity market returns down"

JPMorgan used a complex mathematical model to estimate the likely performance of the S&P 500 over the next decade, but analysts point out that the outlook for lower returns is based on unsustainably high current stock valuations and the fact that the market's performance is given by only a few big names in technology such as Nvidia and Meta Platforms (formerly Facebook).

The bank's team pointed out that over time, equity valuations are moving back towards the mean, which should translate into lower yields in the coming years. As of mid-September, the S&P 500 had a trailing-twelve-month price-to-earnings ratio of 23.7, 25% above the 35-year average of 19.

At the same time, JPMorgan points out that an aging global population may drag equity market returns down, as older investors tend to prefer more conservative assets such as bonds. In addition, increasing tax rates to reduce budget deficits may affect future stock returns, according to bank analysts, writes nasdaq.com.

• Goldman Sachs projects that the S&P 500 will have an annualized nominal return of 3% over the next decade, well below the 13% return of the past ten years

The golden decade of U.S. stock market returns is over, according to a report from Goldman Sachs' portfolio strategy research team published last week, Business Insider writes.

Goldman strategists have estimated that the S&P 500 will have a nominal annualized return of 3% over the next ten years (with a potential range of -1% to 7%), well below the 13% return over the past ten years. "Investors should be prepared for stock returns over the next decade to be at the lower end of the distribution of their typical performance relative to bonds or inflation," wrote the team led by Goldman's chief U.S. equity strategist David Kostin.

There are five elements on which the bank's team predicts bear market returns over the next decade.

• The cyclically adjusted price-to-earnings ratio is well above the historical average

High stock market valuations have historically been followed by lower declines, according to Goldman strategists, who note that currently the Cyclically Adjusted Price-to-Earnings ratio (CAPE) is of 38x or in the 97th percentile (no statistical measure that indicates the position of an observation in a data distribution ordered into a hundred equal parts), say those from Goldman, writes Business Insider.

Since 1940, the average cyclically adjusted price-to-earnings ratio for the S&P 500 has been 22X, according to the bank.

• "It is extremely difficult for any company to sustain high growth in sales and profit margins for long periods of time," according to Goldman

Stock market concentration is near a hundred-year high, meaning the performance of the S&P 500 is heavily dictated by the outlook of a few stocks, according to Goldman strategists.

Nvidia and Alphabet (the parent company of Google) are two of the big names in technology that have driven the performance of the market in recent years, but the fact that the evolution is given by only a few stocks increases the risks. "Our historical analysis shows that it is extremely difficult for any company to maintain high levels of sales growth and profit margins for long periods of time. The same problem arises with a highly concentrated index," Goldman said.

According to the bank's data, companies in the S&P 500 that consistently had revenue growth of more than 20% experienced sharp declines after a period of about ten years.

• More frequent contractions of the United States economy and lower rates of corporate profit growth

Goldman expects the U.S. economy to contract more frequently over the next decade, four times or 10 percent of the quarters, compared to just two such episodes in the previous decade, Business Insider writes.

According to the bank, the average annualized return on S&P 500 stocks has been minus 10% during these periods of economic slowdown.

The profitability of companies is another factor that Goldman includes in its model for estimating stock returns. According to the strategists, the slowdown in the sales and profit growth rate of the largest companies in the US market, as history suggests, will have a huge impact on the entire market.

Last but not least, strategies consider the relative level of ten-year US Treasury yields. They exceeded the 4% level as investors recalibrate their expectations for interest rate cuts, following reports that point to robust economic data and against the background of still persistent inflation.

Under these conditions, Goldman believes that it is more likely that stocks will underperform bonds over the next ten years, assigning this scenario a 72% probability. The strategists' models also provided a 33% probability that the index's return would be below inflation by 2034, according to the cited publication.

• Ed Yardeni: "Average annualized market returns should be closer to 11% over the next decade"

Ed Yardeni, one of the most respected figures on Wall Street and the president of Yardeni Research, believes that Goldman's prediction is much too conservative, writes Business Insider.

Yardeni has argued for two years that the U.S. stock market is poised for a 1920s-like boom thanks to continued productivity growth. "In our view, even Goldman's bullish scenario may not be bullish enough," the Wall Street veteran wrote in a note published last week.

According to the chairman of Yardeni Research, with the US economy growing at 3% year-on-year and inflation moderating to 2%, average annualized market returns should be closer to 11%, in the next decade. "It is hard to imagine that the total return of the S&P 500 will be only 3%, if we consider only the returns from the compounding of reinvested dividends," said Yardeni.

Regarding Goldman's argument that market performance is highly dependent on just a few stocks, the analyst says this is justified by the fundamentals. "While the Information Technology and Communications sectors now represent about 40% of the S&P 500, as they did during the dot-com bubble, companies are much more solid today than they were then," he said.

Yardeni pointed out that the profits of corporations in these two sectors account for more than a third of the profits of all issuers in the S&P 500, compared with less than a quarter at the height of the dot-com bubble in 2000. Furthermore, the definition of a technology company was distorted, as technology is now ubiquitous in all sectors, which contributes to increased productivity, which should support economic growth while keeping inflation under control.

"A lost decade for U.S. stocks is unlikely if earnings and dividends continue to grow at solid rates, boosted by higher profit margins due to technology-induced productivity gains," Yardeni wrote, according to Business Insider.