On Friday, Goldman Sachs (GS) released a research note suggesting that the S&P 500 is likely to deliver an annualized return of just 3% over the next 10 years. The report pointed to the market concentration issue, with more than a third of the index being invested in just 10 stocks, a pattern that has historically led to below-average returns (read: Is S&P 500 Expected to Underperform? ETFs in Focus).
Ben Snider, an equity strategist at Goldman Sachs, emphasized that while the projection might seem bearish, it’s not a signal to exit stocks, as quoted on Yahoo Finance. He explained that the high concentration of a few major stocks, such as NVIDIA NVDA, Apple AAPL, and Microsoft MSFT, is a key factor driving the lower return forecast.
When a small number of stocks dominate the market cap, history suggests that their ensuing correction could lead to underperformance in the broader index. Snider noted that the top 10 largest stocks in the S&P 500 now make up for more than one-third of the index, nearing the highest concentration levels in 100 years.
Goldman Sachs does not foresee an immediate catalyst triggering a downturn but believes that the concentration will eventually unwind. The firm projects that the S&P 500 will touch 6,300 over the next 12 months, but over a longer horizon, the high concentration will likely result in lower average returns.
Not everyone agrees with Goldman’s cautious outlook. Nicholas Colas, co-founder of DataTrek, argued that returns as low as 3% usually only occur when a significant crisis strikes, as quoted on the above-mentioned Yahoo Finance article. He remains optimistic about US equities, believing that disruptive technologies powered by U.S. companies could continue to fuel market gains. Colas expects the next decade’s returns to match or exceed the historical average of 10.6%.
JPMorgan Asset and Wealth Management stated a more optimistic view, agreeing that while stock multiples are high, healthier macroeconomic and corporate fundamentals could lead to solid returns over the next decade.
Total Q3 earnings for the 120 S&P 500 members that have reported results through Wednesday, Oct. 23, are up +1.9% on +4.2% higher revenues, with 79.2% beating EPS estimates and 63.3% beating revenue estimates, per Earnings Trends.
Despite chances of lower returns, investors are not bearish on US equities. Many still plan to hold stocks but are adjusting their high expectations after a great strong decade. Many may be interested in playing quality stocks and exchange traded funds (ETFs), for example, wide moat stocks and ETFs.
In the world of investing, “moat stocks” refer to companies that possess strong competitive advantages. The term was popularized by legendary investor Warren Buffett who said that he seeks “economic castles protected by unbreachable moats.”
Over the past five years, VanEck Morningstar Wide Moat ETF MOAT is up 86% versus 91% gains in the S&P 500 (as of Wednesday). So far this year, MOAT has added 13.9% versus 22.3% gains recorded by the S&P 500. It means, if the mastery of the “Magnificent 7” stocks in the S&P 500 wanes at some point of time and the index starts to lose its luster, quality ETFs like MOAT may rule and save your portfolio in difficult times.
Against this backdrop, below we highlight a few moat ETFs & stocks that can be tapped now.
VanEck Morningstar Wide Moat ETF (MOAT)
The underlying Morningstar Wide Moat Focus Index tracks the overall performance of the 20 most attractively priced companies with sustainable competitive advantages. No stock accounts for more than 2.81% of the Zacks Rank #3 (Hold) fund. The fund charges 47 bps in fees.
VanEck Morningstar ESG Moat ETF (MOTE)
The underlying Morningstar US Sustainability Moat Focus Index is rules-based and intends to offer exposure to attractively priced U.S. companies with long-term competitive advantages that have been screened for ESG risks. No stock makes up more than 3.22% of the portfolio. The ETF charges 49 bps in fees.
Salesforce (CRM)
Salesforce is the leading provider of on-demand Customer Relationship Management (CRM) software, which enables organizations to better manage critical operations, such as sales force automation, customer service and support, marketing automation, document management, analytics and custom application development. Salesforce’s price-to-earnings (trailing twelve month) ratio is 30.67X versus 32.01X P/E possessed by the underlying Computer – Software industry. This indicates undervaluation. Per Morningstar, it is a wide moat stock.
United Parcel Service (UPS)
United Parcel Service is the world’s largest express carrier and package delivery company. UPS transports millions of packages each business day across the globe. The stock has an upbeat VGM score of “A.” The stock trades at a P/E (ttm) of 18.09X versus 20.57X possessed by the underlying Transportation – Air Freight and Cargo industry.
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