Why Goldman Sachs’ prediction of a lost decade for stocks is wrong, according to a market vet

Ed Yardeni, president and chief investment strategist of Yardeni Research, on April 30, 2015

Goldman Sachs’ prediction of a decade of low returns is way too conservative, according to market veteran Ed Yardeni.

Goldman issued a 10-year outlook for the stock market earlier this week, suggesting that the S&P 500 will deliver average annual returns of just 3%, with a potential range of between -1% and 7%.

That prediction didn’t sit well with Yardeni, who has been arguing for the past two years that the stock market is set up for a Roaring 20s-like boom due to the ongoing rise in productivity.

“In our opinion, even Goldman’s optimistic scenario might not be optimistic enough,” Yardeni said in a note on Tuesday.

Yardeni said with the US economy growing at a 3% clip year-over-year, combined with inflation moderating to about 2%, stock market returns should be closer to 11% on an average annualized basis over the next decade.

“It’s hard to imaging that the total return of the S&P 500 would be only 3% in the future given the returns just from the compounding of reinvested dividends,” Yardeni said.

The bulk of Goldman’s bearish long-term thesis on the stock market hinges on the fact that there is a high level of concentration in just a handful of stocks.

But that’s warranted based on the fundamentals, Yardeni said.

“While the Information Technology and Communication Services sectors together now make up about 40% of the overall S&P 500, around the same as at the peak of the dotcom bubble, their companies are much more fundamentally sound today than back then,” he said.

Yardeni explained that these two sectors represent more than a third of the S&P 500’s earnings power, compared to less than a quarter of the index’s earnings at the peak of the dot-com bubble in 2000.

Additionally, the definition of a technology company has been warped as technology is pervasive across all sectors, and that’s helping drive a boom in productivity, which should support economic growth while keeping inflation in check.

Overall, if current trends persist, Yardeni sees a scenario in which the Roaring 20s stock market boom extends into the next decade, which would turn Goldman’s conservative outlook upside down.

“A looming lost decade for US stocks is unlikely if earnings and dividends continue to grow at solid paces, boosted by higher profit margins thanks to better technology-led productivity growth,” Yardeni said.