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What is the S&P 500? A complete guide to this key stock market index<\/p>\n
Understanding the S&P 500: What it is and why it matters<\/p>\n
Over the past several decades, the U.S. stock market has yielded average annual returns of around 10%<\/a>.\u00a0\u00a0<\/p>\n What if those days are over?\u00a0<\/p>\n In recent forecasts, Vanguard projects the stock market will rise by only 3.3% to 5.3% a year<\/a> over the next decade. Morningstar sees U.S. stocks gaining 5.2% a year. Goldman Sachs forecasts the broad S&P 500 index will gain only 3% a year<\/a>.\u00a0<\/p>\n Those numbers aren\u2019t outliers. A roundup of market prognostications, charted by Morningstar<\/a>, finds no one projecting annual returns higher than 6.7% for the domestic stock market in the next 10 years.\u00a0\u00a0<\/p>\n In June, USA TODAY noted that many analysts predict the stock market will end the year with only meager gains<\/a>.\u00a0\u00a0<\/p>\n Some readers reacted with surprise, others with disbelief. Stock indexes have been posting record highs<\/a>, despite lingering inflation, a softening job market and rising import tariffs.\u00a0\u00a0<\/p>\n As it turns out, those record highs are one reason forecasters don\u2019t expect much from the stock market over the rest of this year, nor in years to come.\u00a0\u00a0<\/p>\n Here, then, is a closer look at why economists have dim hopes for the stock market in the next decade and what everyday investors can do about it.\u00a0<\/p>\n Stocks are overpriced\u00a0<\/p>\n The simple reason forecasters don\u2019t expect much from the U.S. stock market over the next decade: stock prices are already very high.\u00a0<\/p>\n Stock indexes have been breaking records. To analysts, that means many stocks are overpriced. Bargains are fewer. The indexes have less room to grow.\u00a0<\/p>\n Just how overpriced is the stock market? Economists have a yardstick to measure that. It\u2019s called the cyclically adjusted price-to-earnings ratio<\/a>, or CAPE ratio. It measures a stock\u2019s price against corporate earnings. It tells you, in effect, whether the stock is overvalued or undervalued.\u00a0<\/p>\n Right now, the CAPE ratio for the S&P 500 stands at 38.7<\/a>. That means stock prices are very expensive, relative to earnings.\u00a0\u00a0<\/p>\n \u201cRight now, the U.S. stock market is trading at more than double the post-World War II average price-to-earnings ratio,\u201d said Randy Bruns<\/a>, a certified financial planner in Naperville, Illinois.\u00a0\u00a0<\/p>\n There are two prior moments over the past century when the CAPE Ratio was really high. One was in 1929. The other was in 1999. In the decades that followed those peaks, the stock market sank like a stone: the Great Depression of the 1930s, and the dot-com bust and Great Recession of the 2000s.\u00a0\u00a0<\/p>\n \u201cOur projection is that that ratio is going to somehow come down,\u201d said Paul Arnold, global head of multi-asset research at Morningstar.\u00a0\u00a0<\/p>\n Investors forget to buy low\u00a0<\/p>\n No one is forcing anyone to purchase expensive stocks. Why, then, do investors keep buying them?\u00a0<\/p>\n It\u2019s easy to recite that old investing adage about buying low and selling high. It\u2019s harder to follow the rule, especially when you don\u2019t know how high is too high.\u00a0<\/p>\n Purchasing stocks when the market is high sounds like a flagrant violation of the buy-low rule. And yet, investment advisers routinely encourage consumers to keep buying stocks<\/a> when prices are high.\u00a0<\/p>\n The reason: Stocks tend to rise over time. Even if you buy high, you can bet the market will eventually climb even higher<\/a>.\u00a0\u00a0<\/p>\n All those headlines about stock-market records function like ads for stocks. And investors keep buying them, pushing prices up.\u00a0<\/p>\n \u201cWhen stocks are going up, investors have this tendency to think that now\u2019s the time to get in,\u201d said Todd Schlanger, senior investment strategist at Vanguard. \u201cStocks are one of the few things people don\u2019t like to buy on sale.\u201d\u00a0<\/p>\n The stock market is too \u2018concentrated\u2019\u00a0<\/p>\n Here\u2019s another reason many forecasters are down on U.S. stocks, and especially the monster stocks known as the Magnificent Seven<\/a>: Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta and Tesla.\u00a0<\/p>\n Together, the Seven represent 34% of the overall value of the S&P 500, up from 12% in 2015, Motley Fool reports<\/a>. That\u2019s called market concentration, and it can be a bad thing.\u00a0<\/p>\n Investors are urged to diversify: not to hold only stocks, and not to hold too much of any one stock.\u00a0\u00a0<\/p>\n The problem with the Magnificent Seven, Goldman Sachs reports, is that their massive growth is unsustainable: \u201cIt is extremely difficult for any firm to maintain high levels of sales growth and profit margins over sustained periods of time.\u201d\u00a0\u00a0<\/p>\n Those seven stocks are \u201calready priced to perfection,\u201d Schlanger said. That\u2019s a gentle way of saying that they are expensive.\u00a0<\/p>\n Vanguard forecasts that growth stocks, the category dominated by the Magnificent Seven, will grow by only 1.9% to 3.9% a year over the next decade.\u00a0<\/p>\n That does not mean the Magnificent Seven stocks are going to crash.\u00a0\u00a0<\/p>\n \u201cI find it hard to believe that something would happen that would throw one of those companies into a tailspin,\u201d said Catherine Valega<\/a>, a certified financial planner in Winchester, Massachusetts. \u201cThe larger companies have resources to pivot, if they need to.\u201d\u00a0<\/p>\n Forecasters question, though, whether the Magnificent Seven will continue to grow at the same fevered pace of the past.\u00a0<\/p>\n \u201cIf those companies are booming, that\u2019s great,\u201d Bruns said. \u201cBut when the writing on the wall hits for those seven companies, it\u2019ll be bad news for the S&P 500 as a whole.\u201d\u00a0<\/p>\n What to do about those gloomy stock forecasts?\u00a0<\/p>\n If you want to avoid market concentration and overpriced stocks, forecasters say, here are some places to look:\u00a0<\/p>\n