Global Equities Forecast: Why Goldman Sachs Sees 7.7% Returns Despite High Valuations

In the report titled Building Long-Term Returns: Our 10-Year Forecasts, the investment bank said its return estimate "sits close to the historical median," supported by structural factors including nominal growth, profitability and shareholder payouts.

The firm noted, "We expect global equities to deliver a 10-year total return of 7.7 per cent in USD," even as starting valuations remain high.

Goldman Sachs uses a building-block model in which long-term equity returns are derived from earnings growth, valuation change and dividend yield. "Earnings growth remains the primary engine of performance. We expect global earnings, including buybacks, to compound at roughly 6 per cent annually," it said. Dividends are expected to contribute around 2 per cent, while valuations are projected to be a modest drag over the decade.

The bank highlighted the downside of current expensive markets, saying valuations start "from elevated levels of roughly 19x forward earnings," but argued that this does not derail the long-term outlook. "Valuation, however, is not the whole story," it said, adding that structurally higher margins and improved return on equity help justify these levels.

Goldman Sachs expects meaningful performance divergence across regions over the next decade. Emerging Markets to give the highest returns at 10.9 per cent, driven by strong EPS growth in China and India.

Asia ex-Japan to generate 10.3 per cent, supported by 9 per cent earnings growth and a 2.7 per cent dividend yield. Japan to give 8.2 per cent, aided by reforms and 6 per cent EPS growth.

The report noted that equities in Europe are likely to generate 7.1 per cent, with half the return coming from dividends and buybacks. Whereas, equities in the United States will give the lowest return as compared with major regions at 6.5 per cent, due to elevated valuations and modest dividends.

While the forecasts do not explicitly model AI's potential boost, Goldman Sachs acknowledged that artificial intelligence could provide upside. The firm said long-term benefits from AI "should be broad-based rather than confined to US Technology."

However, the bank's baseline forecast excludes "extreme shocks or blue-sky optimism," but alternative scenarios range from 3.6 per cent annualised returns in a downside case to 10.5 per cent in an upside scenario, driven by faster nominal growth and margin expansion.

Despite the uncertainties, Goldman Sachs concludes that long-term investors should expect broadly favourable outcomes: "We expect global equities to deliver solid long-term returns despite elevated valuations."

- ANI