When Goldman Sachs talks, (investing) people listen. At least they should be listening. So, what happens when one of the mightiest and prestigious investment banking giants warns investors that stock returns are going to be significantly lower and quite unexciting over the next decade?  That happened this week.

Goldman Sachs Research has published that the firm now expects the S&P 500 to deliver a mere 3% annualized nominal total return over the next decade. It’s almost as if Goldman Sachs is telling its U.S. equity clients, or at least those who are set to retire in the next decade, to not even bother. Or maybe this is the first of multiple efforts to stress that you better jump in hard and selectively in the next major stock market correction.

ARE INVESTORS NOW ON NOTICE?

Keep in mind that “total return” means “dividends included.” Most total return investors also include those dividends being reinvested as well. This is a report that most Generation X investors will hope and pray is not true.

First and foremost, do not forget what Goldman Sachs actually does outside of trading for its own accounts and its underwriting business. This bulge bracket firm’s nickname of “Golden Slacks” is owed in part to the fact that Goldman Sachs only caters to institutional investors and to high-net-worth (HNW) investors. If you don’t believe that, just call a Goldman Sachs broker up (they call them advisors now) and tell them you want to open an investing account with a few thousand dollars.

Equities are supposed to have historic returns of somewhere around 6% to 8%. In the era of low/no interest rates it was quite higher. Goldman Sachs noted that equities have generated 13% in annualized returns over the past decade, and its figure used for the long-term performance is now 11% returns. The analysts’ forecasts include a range of outcomes from -1% to 7% and they show that projections for long-term U.S. equity returns average 6%.

One of the key drivers is not exactly that economic growth is going to die, but that’s an issue along with competing assets classes. The most important variable in this forecast is starting valuation. David Kostin, chief US equity strategist at Goldman Sachs Research, said:

“In theory, a high starting price, all else equal, implies a lower forward return.”

You just heard that the starting point (i.e. current market valuations and index levels) are high. To prove the point specifically, the S&P 500 and Dow Jones Industrial Average have both just recently just hit all-time highs.

THE OTHER PROBLEMS

One major issue that was brought up is that the 10 largest stocks in the S&P 500 now account for more than one-third of the entire index market capitalization. And before you ask, the answer is “No, that is not normal. Not normal at all.”

This degree of high market concentration is currently at a multi-decade high. Actually, unless you are already well into your nineties you haven’t seen high concentrations of this magnitude ever. This high concentration is expected to be a serious drag on the firm’s forecasts from analysts. But even removing the high concentration doesn’t exactly imply that the current market levels are supportive of blockbuster returns ahead.

Goldman Sachs’ baseline return forecast would be roughly 4 percentage points higher. That’s 7% targeted returns rather than 3% targeted returns. This would raise the previously-shown range of -1% to 7% up to a range of 3% to 11% over the long haul. The firm did have a podcast recently which also shows investors to think beyond just owning the big tech giants and to broaden their portfolios ahead.

Another warning is that U.S. stocks will face stiff competition from other assets at such low levels of return. The firm is now forecasting:

• The S&P 500 has roughly a 72% probability of underperforming bonds through 2034.
• It also suggests a 33% probability of underperforming against inflation through 2034.

The report also goes on to show that economic contraction frequency is a variable. Corporate profitability and interest rates are also given to support this view of low returns.

Other classes that may outperform were not highlighted specifically in this summary but they did offer other examples in the link above. The same Briefings communication did highlight several issues: Chinese stock gains are likely to rally again; global sports are a growing and complex asset class; and private market investors feel more optimistic.

ALSO READ: A SINISTER ASPECT OF HIGHER LONG-TERM BOND YIELDS

WHY THIS HITS HOME NOW

This is one of those reports that Generation X investors really hoped to avoid. After all, reaching your retirement goals in the next 10 years or so will not be all that easy at just 3% annualized total returns.

Using a 3% Return on the SEC’s Investor.gov compounded interest calculator shows how this works over time if Goldman Sachs’ forecasts prove to be true. An initial lump sum investment of $100,000 at 3% for 10 years (compounded annually) will result in total funds of $134,391 after 10 years with no additional contribution. And adding $1,000 per month (with compounding annually) over this 10-year horizon would come to $271,958.

If you look at fresh high dividend review from Tactical Bulls, the warning here is that the overwhelming majority of equity returns in the next decade will be owed to dividends.

If Goldman Sachs is (unfortunately) correct in its outlook for the next decade, investors better be prepared to jump in if there is a sizable market correction or into the next bear market. That’s not investment advice, but this who presentation sure lends credence to equal-weight ETFs and other sectors beyond just the mega-cap techs that have driven so much investor returns in the last decade.