Goldman Sachs Forecasts Positive Long-Term Global Equity Returns Despite High Valuations

Goldman Sachs projects a 7.7% annualized return for global equities over the next decade, even as current valuations remain high. Key drivers include earnings growth and dividends, with emerging markets expected to yield the highest returns. The firm notes potential gains from AI, but advises caution with alternative scenarios.

Goldman Sachs has projected that global equities are poised to offer solid long-term returns, despite currently elevated valuations. In its latest Global Strategy Paper, the investment bank forecasts an annualized return of 7.7 percent in USD terms over the coming decade, aligning closely with the historical median. Factors such as nominal growth, profitability, and shareholder payouts underpin these predictions.

The report titled 'Building Long-Term Returns: Our 10-Year Forecasts,' highlights a building-block approach to estimating long-term equity returns based on earnings growth, valuation changes, and dividend yield. Goldman Sachs expects global earnings, including buybacks, to compound at around 6 percent annually, with dividends contributing about 2 percent, while high starting valuations are seen as a modest drag over time.

Despite the downside of expensive markets, Goldman Sachs maintains an optimistic outlook, citing structurally higher margins and improved return on equity as justifications for current valuation levels. The report anticipates significant regional performance disparities, with emerging markets likely to offer a 10.9 percent return, driven by robust EPS growth in China and India. Meanwhile, Asia ex-Japan and Japan are expected to produce 10.3 and 8.2 percent returns, respectively, leveraging earnings growth and reforms. European equities are predicted to generate 7.1 percent, while the U.S. market is seen providing the lowest returns among major regions at 6.5 percent due to high valuations and modest dividends.

Goldman Sachs also notes the potential impact of artificial intelligence on returns, suggesting that AI's benefits could be widespread rather than confined to the U.S. technology sector. However, the bank's baseline forecast is conservative, excluding extreme scenarios but recognizing potential annualized returns ranging from 3.6 percent in a downside case to 10.5 percent in an upside scenario. Overall, Goldman Sachs advises long-term investors to anticipate generally favorable outcomes, despite prevailing uncertainties.

(With inputs from agencies.)