Goldman Sachs: New Global Market Outlook to 2035

In a notable departure from recent trends, investment banking giant Goldman Sachs has released a comprehensive stock market forecast extending through 2035. This forward-looking analysis presents a perspective that may surprise many U.S. investors, suggesting a significant shift from the tech-fueled gains and expanding valuations that characterized the past decade. The firm anticipates a more 'normal' market environment ahead, where fundamental earnings growth, rather than multiple expansion, will be the primary driver of returns.

Goldman Sachs' Long-Term Market View to 2035

Goldman Sachs projects a modest 6.5% annual return for the S&P 500 through 2035. This figure stands in stark contrast to the double-digit returns investors have grown accustomed to. The underlying arithmetic for this forecast is straightforward: it combines steady 6% earnings growth, a mild valuation headwind, and a modest dividend yield. This outlook underscores a market where diligent fundamental analysis and consistent business performance will be rewarded, rather than speculative euphoria.

A Decade of Earnings-Driven Growth for the S&P 500

The core tenet of Goldman Sachs' forecast is a market increasingly defined by earnings power. This signifies an environment where companies that consistently grow their profits, implement intelligent pricing strategies, and deliver tangible results will outperform. The firm posits that the days of significant pricing multiple expansion, which have historically done much of the 'heavy lifting' in terms of returns, are drawing to a close.

The Waning Era of Multiple Expansion

Goldman Sachs holds a clear stance on valuations: current Price-to-Earnings (P/E) levels are considered "very high relative to history." More critically, these elevated multiples are deemed unsustainable as the structural tailwinds that have historically boosted profit margins begin to fade. The firm’s updated model suggests a fair-value P/E ratio of 21x by 2035, indicating a gradual moderation from the current 23x ratio. This projection is underpinned by several key constraints:

• Profit Margin Normalization: Corporate profit margins are currently near record highs, having jumped from 5% in 1990 to approximately 13% today. This surge was primarily fueled by global supply chain efficiencies and decades of declining interest and tax expenses. Goldman Sachs believes these specific tailwinds are unlikely to recur, suggesting a stabilization or even a slight contraction in margins.
• Elevated Treasury Yields: The firm embeds a 4.5% 10-year Treasury yield into its analytical framework. Such a yield level leaves minimal room for further valuation expansion from current equity levels. Consequently, the next decade is expected to be predominantly defined by organic earnings growth, rather than a speculative stretch in multiples.

Corporate America's Resilient Earnings Performance

Goldman Sachs' forecast arrives at a time when U.S. corporations continue to demonstrate robust performance. Recent quarters have showcased broad earnings beats, indicating that the fundamental economic engine is running more strongly than many anticipated.

• Q2 Strength Beyond 'Mag 7': The second quarter of the year saw a widespread earnings upgrade rather than solely a 'Magnificent Seven' phenomenon. By August, 66% of S&P 500 companies had reported, with 82% surpassing EPS estimates and 79% beating sales forecasts. Blended EPS growth reached an impressive 10.3% year-over-year, significantly exceeding the pre-season 2.8% forecast.
• Sustained Q3 Momentum: The momentum continued into the third quarter. Approximately two-thirds of businesses reported, with 83% beating EPS estimates and 79% exceeding sales forecasts, comfortably above historical five- and ten-year averages. The index is poised for an estimated 10.7% earnings growth, marking its fourth consecutive quarter of double-digit bottom-line gains.
• Big Tech's Leading Role: In both Q2 and Q3, eight of the S&P 500's eleven sectors reported year-over-year earnings growth, while ten sectors demonstrated sales growth. This collective performance has powered a remarkable 19- and then 20-quarter streak of uninterrupted revenue expansion, with large technology companies playing a significant, albeit not exclusive, role in leading these gains.

Shifting Investment Horizons: Beyond U.S. Borders

Perhaps the most compelling aspect of Goldman Sachs' long-term analysis is its implication for U.S. investors: the best returns over the next decade may not originate from within the United States. While the S&P 500 is projected for a respectable 6.5% baseline return, the firm highlights significantly higher potential in other regions:

• Emerging Markets (EM): +10.9%
• Asia ex-Japan: +10.3%
• Japan: +8.2%

The Allure of Emerging Markets and Asia

Emerging Markets and Asian economies are expected to benefit from several powerful tailwinds, positioning them for superior performance:

• Robust Nominal GDP Expansion: These regions generally exhibit more dynamic nominal GDP growth, which provides a fertile ground for corporate revenue and earnings expansion.
• Structural Reforms: Many of these economies are undertaking significant structural reforms, including initiatives to improve corporate governance and enhance market efficiency. These reforms are expected to lead to improved business environments and greater investor confidence.
• Growing Payout Ratios: Goldman Sachs anticipates a rise in EM dividend yields, projecting an increase from 2.5% to 3.2% by 2035. This trend, coupled with governance upgrades in key markets like Korea and China, transforms these regions into potentially powerful compounding machines for long-term investors.
• Currency Dynamics: A crucial factor is currency valuation. Goldman Sachs’ FX strategists believe the U.S. dollar is approximately 15% overvalued and forecast a decade-long reversal. This anticipated dollar weakness could significantly boost USD-translated EM returns by an estimated 1.7% per year, historically aligning with periods of foreign market outperformance.
• Strong Earnings Power: The earnings growth in Emerging Markets is spearheaded by powerhouses like China and India, contributing substantially to the projected 10.9% baseline return. Similarly, Japan’s ongoing economic reforms are expected to drive earnings growth, translating into an 8.2% return.

In conclusion, Goldman Sachs’ 2035 forecast presents a compelling case for a recalibration of investment strategies. With a projected return to earnings-driven growth for mature markets and significant opportunities identified in dynamic international economies, investors are encouraged to look beyond traditional strongholds and embrace a more globally diversified approach. The next decade, as envisioned by Goldman Sachs, will reward strategic foresight and an appreciation for fundamental value across diverse geographies.