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Highlights
- Wall Street may face a challenging decade ahead.
- Global superannuation returns could slow down due to concentrated markets.
- Investors may expect slower growth compared to the last decade.
Wall Street has experienced significant growth over the past decade, with the S&P 500 delivering a nearly 200% return in the last ten years. However, some experts believe this momentum may be slowing down. The chief investment officers of Australia’s largest superannuation funds have benefited from these strong returns, with international shares making up around 27% of superannuation assets as of June this year. For AustralianSuper, one of the country’s largest funds, overseas stocks currently make up 30.1% of its balanced portfolio.
The exceptional performance of U.S. markets, driven by powerhouse stocks like Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN), has been a key contributor to the robust returns for Australian super funds. However, David Kostin, the U.S. equity strategist from Goldman Sachs, suggests that Wall Street may be entering a "lost decade." His forecast predicts just a 3% annual return for the S&P 500 over the next ten years, including dividends, which could have a significant impact on long-term performance expectations for super funds and pension plans worldwide.
One of the major concerns Kostin highlights is the valuation of U.S. stocks. He points out that high starting prices often imply lower forward returns. While current U.S. stock valuations may not seem alarming in the context of interest rates and profitability, they are high when compared to historical averages. This overvaluation, coupled with the concentrated nature of the U.S. market, presents a risk. The top ten companies, including Apple (AAPL), Amazon (AMZN), and Berkshire Hathaway (BRK.A), now make up 36% of the S&P 500, which is unprecedented.
Kostin also warns of increased volatility as larger companies face challenges like regulatory scrutiny and intensified competition. Over time, these factors could slow earnings growth for the biggest names in the index, ultimately affecting the broader market's returns. He notes that equities may face competition from other assets, such as bonds, which are offering competitive yields in the current economic environment.
For superannuation funds and pension plans, these developments mean reassessing their long-term return assumptions. While funds generally aim for inflation plus 4%, the current economic climate may make it harder to meet those targets in the coming decade.
