Goldman Sachs, GS, has said that there is a 72% chance the S&P 500 will underperform bonds during the next decade

Goldman Sachs, $GS, has said that there is a 72% chance the S&P 500 will underperform bonds during the next decade.

Goldman Sachs warns that the impressive stock market gains of the past decade could give way to much lower returns over the next ten years.

Analysts at Goldman predict the S&P 500 could deliver a nominal annualized return of just 3% over the next decade, according to a note from October 18. They see a -1% annualized return as the low end of likely outcomes, while a 7% return represents the high end. Even at this upper range, returns would be significantly below the 13% annualized total return seen over the past decade.

“Investors should prepare for equity returns in the coming decade that may sit towards the lower end of their typical distribution relative to bonds and inflation,” the analysts noted.

Goldman’s analysts also see a 72% likelihood of the S&P 500 underperforming bonds in the next decade, with a roughly one-third chance of it lagging inflation. They estimated a 4% chance of an absolute negative return for stocks over this period.

Goldman’s cautious outlook is partly due to an expectation that U.S. GDP could contract for four quarters, or about 10% of the time, over the next ten years. Another factor is the risk associated with market concentration, as the top ten S&P 500 companies now make up over a third of the index. Goldman’s return estimate would be higher if not for the index’s high concentration, which could dampen overall returns if growth and profitability in these dominant stocks slow.

With their 3% annualized return estimate, Goldman’s outlook is more conservative than the consensus of 6% expected by other market participants. Goldman cautioned that long-term return assumptions, like those of corporate and public pension plans, may be overly optimistic.