Goldman Sees S&P Gaining Just 6.5% Annually for Decade Ahead—Here’s How to Do Better

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Quick Read

• Goldman Sachs (GS) projects the stock market will deliver 6.5% annualized returns through 2035.

• The Schwab Fundamental International Equity ETF has gained over 35% year to date.

• Berkshire Hathaway (BRK-B) may outperform the S&P 500 over the next decade under CEO Greg Abel.

• Some investors get rich while others struggle because they never learned there are two completely different strategies to building wealth. Don’t make the same mistake, learn about both here.

This past week, analysts over at Goldman Sachs (NYSE:GS) made a bold prediction that the stock market would deliver 6.5% in annualized returns through 2035. Undoubtedly, that pours cold water over what's been a rather hot rally off the lows of November.

And while there are more bullish analysts out there who expect more from the broad financial markets over the next decade, I do think that elevated valuations could remain the number-one drag on prospective returns moving forward. Undoubtedly, Goldman Sachs analysts have noted that valuations are coming in at the high end historically. When you look at the performance of the broad market minus the Magnificent Seven, you'll see just how much AI and the tech titans have contributed to the past year of gains.

At some point (perhaps that point is now), the Mag Seven are going to need to take a breather as investors question the premium valuations they'll need to pay for AI exposure that might not pay off in the next year or even the year after that. Though the more distant future (think 2030 and beyond) is tough to gauge, I do think that today's AI expenditures will experience a gradual payoff, whether that's in three years or in a decade's time.

How that impacts prospective returns remains a big question mark. In any case, if you're feeling underwhelmed by the path forward for the S&P 500 (the index has averaged closer to 10% per year, so 6.5% is quite a backward step for the next decade), there are ways to spruce up your prospective returns. Here are three ways to do better than the S&P 500 if it is due for milder returns for the next 10 years.

International stocks have lower valuations and perhaps higher prospective returns

First, Goldman Sachs analysts suggest going international is a good way to go, especially for the many U.S. investors who haven't bothered to. Many developed international markets have outshone the U.S. this year, and if that's the start of a trend, investors might wish to show more preference to the likes of a Schwab Fundamental International Equity ETF (NYSEARCA:FNDF), which has clobbered the S&P this year, gaining more than 35% year to date. It's hard to say if there's more outperformance up the international ETF's sleeves.

If valuation starts to mean more than growth narratives, my guess is the international ETFs are going to keep faring better. Either way, Goldman's suggestion that investors diversify more internationally is an exceptional piece of advice that's wise to follow. Personally, I prefer large-cap developed international stocks over small-caps or emerging markets for their AI advantages. AI costs money to adopt, and deeper pockets are a must to see those earlier gains, at least in my opinion.

Don't be afraid of the small- and mid-cap stocks. Many are cheap and growthy

Far too many investors steered clear of the smaller-cap companies, but you can't blame them, especially since there are so many small-caps out there with lackluster profitability prospects and far more volatility than the blue chips. Still, I think reaching for a small-cap ETF makes it simple for retail investors to gain exposure to a corner of the U.S. market that might be ripe for outperformance, especially as valuations act as a drag on the large-caps.

The iShares Core S&P Small-Cap ETF (NYSEARCA:IJR) is a great pick to diversify into the space, given its focus on profitability. In a prior piece, I also praised the small-cap ETF for its nearly 2% yield, which is only possible because of the ETF's methodology and focus on the smaller-cap money makers.

Bet on cheaper corners of the U.S. market

Finally, if you don't want to settle for the mediocrity of the S&P, perhaps picking one's own stocks is a smart move. You don't have to overweigh the expensive AI titans. Instead, you can pick your spots and overweight the names, such as Berkshire Hathaway (NYSE:BRK-B). In my opinion, Berkshire looks like a far more enticing bet than the broad market for the next decade, especially given extended valuations in the S&P's larger holdings.

Of course, Berkshire after Buffett might not be as exciting, but the conglomerate is in some very good hands. And with Buffett passing the baton with a mountain of cash, I think incoming CEO Greg Abel is set up for success. Ultimately, I think Berkshire can outdo the S&P, as the money managers continue to make smart value-focused bets across the market. Instead of owning the 500 stocks in the S&P, perhaps going for the one name run by Buffett's successors is the way to go.

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