Approximately Right Forecasts
Ask a CIO #24
I didn’t immediately make the connection between Elon Musk’s proposed Department of Government Efficiency (DOGE) and his apparent affection for Dogecoin. So DOGE is going to be a real thing, and this real task force might have real power, but DOGE also jokingly references a memecoin (that now appears to hold real value) based on a silly meme.
I’m not making light of the situation, but I’m also not NOT laughing at the absurdity of it all. Matt Levine sums it up better in his November 13 Bloomberg Money Stuff column:
“Musk is widely assumed to be a big holder of Dogecoin, though it’s never been all that clear to me how true that is. Presumably Dogecoin is not a big percentage of his net worth, and the benefits of a Trump administration for Tesla and SpaceX and his other companies are obvious. Still there is something so pure about this. This is like … the president of the United States announced a new government department (or, fine, whatever, vague blue-ribbon commission with a name that makes it sound like a government department) whose name acronyms to the name of a meme token that the president’s big financial backer — who will run the department — promotes online and presumably owns a lot of. And so the token goes up. It is so much simpler than, you know, giving SpaceX government contracts or whatever; you just tweet the name DOGE and Dogecoin goes up. It is trolling, but with a market value, and a government department.
We talk a lot about meme finance as a market phenomenon, but we are in the early days, and it will be interesting to see what transactions it enables.”
Also from Levine: “it is way past time for someone to write a textbook of meme finance.” I would totally read that book.
This week’s question is centered more on traditional finance, which I fortunately understand better than I understand meme finance.
Goldman Sachs is predicting a 3% annual return for the S&P 500 for the next 10 years. How should investors think about this information?
Ah yes, Goldman’s prediction has caught a lot of attention and has been widely reported. Let’s take a look at Goldman’s October 18th Global Strategy Paper, which leads off by saying the firm is estimating a 3% annualized nominal return during the next 10 years. I’ll highlight here that Goldman references 3% as the annualized nominal expected return. In other words, assuming a steady 2% annualized inflation rate (the Fed’s stated target), Goldman’s annualized real expected return for the S&P 500 is only 1% for the next 10 years.
Some additional context that is discussed in the Strategy Paper but that doesn’t seem to be as widely covered in the news reports I’ve seen. First, Goldman is well aware of the uncertainty inherent in these types of forecasts. In addition to the 3% estimate, the firm also provides a range of likely S&P 500 outcomes, with expected 10-year annualized nominal returns falling between -1% and 7%. Second, Goldman acknowledges that its model is sensitive to the starting valuation input (i.e. a high starting price for the S&P 500 implies a lower forward return). Finally, Goldman acknowledges that its 10-year forecast is outside of the consensus (chart below pulled from the Strategy Report):
For comparison, JP Morgan, another commonly referenced provider of return forecasts (aka capital market assumptions), expects U.S. large cap equities to return 6.7%, which would fall squarely into the consensus in the chart above.1
As with previous annual reports of long-term capital market assumptions, I expect all of these capital market assumptions to be approximately right but likely, precisely wrong.
Moreover, these are long-term assumptions. In 10 years’ time, we could find that Goldman (or another research desk) was right. Let’s say that in 2034, the historical 10-year annualized return of the S&P 500 does turn out to be 3%. But in any given year from now until then, the annual return could be significantly higher or lower – who knows which random walk we would take from here to there.
So what’s the point, and how should investors think about these estimates?
For starters, the muted expectations for large cap U.S. equities reflects a broadly accepted reality that the S&P 500 has experienced abnormally high returns in recent years. It would be reasonable to say that, to some extent, current valuations are factoring in future earnings growth, and many upside scenarios are already priced in. In short, it’s likely we’re enjoying high returns now at the expense of lower returns later. And I would agree that the forecasted 10-year equity ranges seem plausible.
Next, although the individual asset class forecasts are interesting, the relative expectations between asset classes may be more useful. For example, JP Morgan expects that U.S. large cap equities will return 6.7% annualized over the next 10 years, but it expects that Private Equity will return 9.9% annualized over the next 10 years. Similarly, BlackRock expects U.S. equities to return 6.6% annualized over the next 10 years, but it expects that Private Equity will return 10.2%.2 These are just two examples, but across a sampling of capital market assumptions, certain relative return expectations are more consistent (one of which is, private equity is expected to outperform public equities by a reasonable margin).3
Finally, putting it all together, these capital market assumptions (in aggregate) are a set of data points that can help inform asset allocation decisions. A lot of analysis on historical data, present conditions, and of course, future assumptions, go into these forecasts. And although I doubt they’ll be exactly right, I do think they’ll be generally, directionally correct. Which is to say, I believe the highest potential long-term future returns exist outside of public equities and bonds, and a diversified portfolio with public and private market investments will be better positioned over the coming years.
This expected return differential isn’t news to institutional investors, who have been incorporating private investments into their portfolios for decades. I imagine it’s less familiar to individual investors today, but I’m willing to bet it’ll become more familiar over the next decade. As with many other aspects of investing, the details matter – results will vary depending heavily on how private investments are incorporated into asset allocation, portfolio construction, and manager selection decisions.
Thanks for joining, and as always, reach out at askacio@ivyinvest.co!
Until next week,
Wendy
Press release that includes data here: J.P. Morgan Unveils 2025 Long-Term Capital Market Assumptions, Highlighting Strong Foundations for 60/40 Portfolios and Opportunities to Enhance Returns Through Active Management and Alternatives | J.P. Morgan Asset Management. Full report available here for professional and institutional investors only: Long-Term Capital Market Assumptions | J.P. Morgan Asset Management.
It’s worth noting that Capital Market Assumptions are the expected “index” return for each asset class. In asset classes where manager selection can generate additional alpha (and I would say private markets definitely falls into this category), the potential total return can be higher.
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