The 7.7 Percent Mirage
Wall Street is fixated on a single number this week. Goldman Sachs Research just released its ten-year outlook, projecting a 7.7% annualized return for global equities through 2035. On the surface, this feels like a reprieve from the 3% ‘lost decade’ warnings issued a year ago. However, the data reveals a brutal divergence. This is not a rising tide for all boats; it is a fundamental shift in where capital must reside to survive the next cycle.
The 7.7% figure is an aggregate, heavily skewed by a projected 10.9% return in emerging markets and an 8.2% surge in Japan. For the domestic investor, the reality is far leaner. Goldman’s model assigns a mere 6.5% to the S&P 500, a figure that ranks in the bottom 27th percentile of historical ten-year windows. The era of double-digit US gains, fueled by multiple expansion and zero-interest rates, is dead. Returns now depend entirely on the ‘building blocks’ of earnings growth and dividend yield.
Deconstructing the S&P 500 Valuation Drag
The mathematics of the 6.5% US forecast are unforgiving. Per the Nov 21 Goldman report, the primary engine is a 6.0% compound annual growth rate (CAGR) in earnings per share, which includes the impact of corporate buybacks. Dividends add approximately 1.4%. However, these gains are eroded by a -1.0% annualized drag from valuation contraction.
US equities currently trade at roughly 22x forward earnings, a level that historically invites gravity. As the Federal Reserve’s recent minutes suggest, the path to a ‘neutral’ rate is fraught with friction. With the Fed Funds Rate currently at 3.75%–4.00%, the equity risk premium remains compressed. Investors are essentially paying a premium for growth that is already priced to perfection. To achieve even a 6.5% return, US corporate margins must remain at record highs, a difficult feat as labor costs and debt-servicing burdens normalize.
| Return Component | US Outlook (S&P 500) | Global Outlook (MSCI World) |
|---|---|---|
| Earnings Growth (incl. Buybacks) | 6.0% | 6.0% |
| Dividend Yield | 1.4% | 1.1% |
| Valuation Change (P/E Impact) | -1.0% | -0.3% |
| FX / Currency Impact | 0.0% | +0.6% |
| Total Annualized Return (USD) | 6.5% | 7.7% |
The Pivot to Emerging Alpha
The real alpha in this forecast lies in the projected 1.7% outperformance of global stocks over the US. This gap is driven by a long-overdue reversal of the US Dollar’s dominance. Goldman’s foreign exchange team anticipates a front-loaded depreciation of the greenback starting in late 2025, which adds 60 basis points to the total return for USD-denominated global portfolios. This makes the recent volatility in the DXY index more than just noise; it is the first signal of a structural regime change.
Emerging markets, specifically India and China, are expected to deliver 10.9% annually. This is not speculative hope. It is based on a convergence of higher nominal GDP growth and rigorous corporate governance reforms. In Japan, the 8.2% forecast is underpinned by policy-led improvements in shareholder distributions. For the first time in twenty years, the ‘Rest of the World’ is not just a diversification play; it is the primary growth engine.
Investors holding concentrated US tech positions face a double-edged sword. While AI-driven productivity gains are expected to bolster earnings, the concentration risk is at historical extremes. The top ten stocks in the S&P 500 now account for 38% of the index’s market cap. This level of crowding makes the index vulnerable to even minor earnings misses, as seen in the choppy price action following the mid-November semiconductor results. The 7.7% global forecast assumes you are willing to look past the Nasdaq and toward the MSCI EAFE and EM indices.
The next critical data point for this thesis arrives on December 10, 2025. The Federal Open Market Committee will meet to decide if a third consecutive 25-basis-point cut is warranted. If the Fed pauses due to sticky PCE inflation (currently at 2.7%), the ‘valuation drag’ on US equities will intensify, further widening the performance gap between the S&P 500 and its global counterparts.
