Is your portfolio prepared for a lost decade in the stock market? Over the last 10 years, the S&P 500 index has averaged a stunning 13% return annually (with dividends reinvested), well above historical averages thanks to market-friendly trends such as low inflation, near-zero interest rates, stable economic growth and advances in information technology. But now many of those trends that raised corporate profit margins and stock prices are peaking or even reversing.
Top Wall Street research firms predict the stock market’s prospects into the 2030s are mediocre at best. Goldman Sachs projects a 3% annual return…Vanguard says 2.8% to 4.8%, and just 0.1% to 2.1% for growth stocks. Nobel prize–winning economist Robert Shiller, whose dependable forecasts use price-to-earnings ratios (P/Es) and corporate earnings’ 10-year rolling averages, sees long-term returns of 2% to 3%.
What that means for small investors: You could get similar returns just holding 10-year US Treasury bonds and take no risk at all.
Stock expert William Smead thinks there’s a better approach. He is positioning his portfolio in sectors that have historically performed well in the new economic environment and in areas of the market that held up during past periods when US stocks have stumbled.
Bottom Line Personal asked Smead to explain why the stock market is headed for years of next-to-nothing returns and what strategies and investments he’s using to profit….
The four most dangerous words in investing are…This time is different. Investors have become convinced that the US stock market is the only one capable of delivering strong, sustainable returns and that it can continue to defy gravity.
But that won’t be the case. History shows that stock market performance is always cyclical and the particular stocks that have reigned over one decade rarely lead the market over the subsequent decade.
The crux of my concern is the unusual concentration in a few wildly expensive stocks in the S&P 500 index, including Alphabet, Amazon.com, Apple, Microsoft, Meta Platforms, Nvidia and Tesla. These “Magnificent Seven” were responsible for 62% of the entire S&P 500’s gain in 2023 and more than half its gains in 2024. But it is extremely difficult for any firm, no matter how innovative and revolutionary, to maintain stratospheric levels of sales growth and profit margins over a long period.
Other reasons I foresee a lost decade in US stocks…
Inflationary forces are everywhere—the potential for tariffs and less free trade…higher labor costs… and soaring federal-budget deficits. Inflation will keep interest rates higher, which raises the cost of borrowing, slows economic growth and can dampen stock performance.
By 2030, everyone in the baby-boom generation will be 65 or older. Result: They will increasingly shirk stocks in favor of more conservative investments such as bonds. That’s a significant threat since baby boomers now account for 54% of all corporate equity and mutual fund ownership.
AI is an extraordinary technology that will change our lives and boost productivity. But it may not happen as rapidly as investors hope. AI stocks have achieved euphoric gains—but they also have created astronomical expectations. Like Internet stocks in the late 1990s, AI companies are likely to see a bust in their share prices before another boom.
Even if the broad stock market indexes and mega-cap tech stocks struggle in the coming years, I see plenty of opportunities to make money. Here’s how…
The transition to renewable energy will take much longer than anticipated. I expect oil-and-gas-related companies to outperform in the next decade due to continued high demand for fossil fuels… increased geopolitical instability impacting supply… and more disciplined capital spending by energy companies, which have improved their profitability and dividend payouts. Energy stocks generally perform well during periods of higher inflation and have a lot of room to grow. They currently account for 3% of the S&P 500 index. That’s less than one-third of their 2008 peak. Two of my favorite oil-and-gas stocks now…
APA (APA). The small oil-exploration-and-production company in Houston has an eclectic global footprint. It is the largest oil producer in the Egyptian desert, as well as an offshore driller in the UK and Surinam. APA is buying back stock shares and raising its dividend at a fast pace. It recently paid a dividend yield of 4.83%. Recent share price: $20.70.*
Occidental Petroleum (OXY) is a leading producer and acreage holder in the Permian Basin in West Texas, an area with the largest and most lucrative shale-oil reserves in the US. The stock is a favorite of Warren Buffett, who has amassed 28% of the outstanding shares in the company. Recent share price: $XX.XX.
Real estate investment trusts (REITs) perform well during periods of higher inflation because landlords can typically raise rents to match rising costs, and property values increase as well. Home builders should thrive because there is a chronic housing shortage in the US. I expect demand for entry-level housing to increase as more members of the Millennial generation enter their 30s and 40s. Two of my favorite real estate–related stocks now…
Lennar (LEN), one of the largest public homebuilders in the US, builds more than 70,000 new homes a year, mostly in the Sun Belt states. In a bid to increase production speed and decrease costs, Lennar recently partnered with ICON Home to develop housing subdivisions using 3D-printed structural elements. Recent share price: $119.63.
Macerich (MAC). This REIT has successfully repositioned itself as an owner of premium shopping malls, which attract upscale retailers who run effective brick-and-mortar operations. The company owns 48 properties representing 45 million square feet of leasable space in dense markets such as Broadway Plaza in Walnut Creek, California, and Green Acres Mall in Valley Stream, New York. Recent dividend yield: 3.77%. Recent share price: $18.04.
These businesses are helped by higher interest rate environments, allowing them to earn better profit margins on loans and consumers’ outstanding balances. Right now, the financial-services sector makes up just 11% of the S&P 500, about half of its peak before the global financial crisis in 2008. One of my favorite financial-services companies now…
American Express (AXP). The iconic brand operates in 130 countries. American Express makes money through a high, annual membership fee that comes with top-notch perks and through changing merchants for processing transactions. Last year, the company saw record levels of annual member spending and card-fee revenues, and it issued 13 million cards to new members. American Express should continue to benefit from robust travel and entertainment spending. The stock is another long-time Warren Buffett favorite. He owns more than 20% of the company’s outstanding stock shares. Recent share price: $300.96.
Foreign markets have underperformed the US market for years. With higher global inflation in the future, I especially like foreign energy companies. They will benefit from the same advantages as their US counterparts, albeit with more attractive valuations. Two of my favorite foreign oil-and-gas related stocks now…
Cenovus (CVE). Canada has the third-largest oil reserves in the world, after Venezuela and Saudi Arabia. Cenovus boasts a portfolio of more than three million acres across Canada. The heart of its operations is in northern Alberta’s Athabasca oil sand deposits, a mixture of sand, clay and a kind of oil called bitumen which is too thick to flow on its own. In addition, Cenovus operates major US refineries in Ohio, producing gasoline, jet fuel, asphalts and other products, as well as offshore natural gas projects in China and Indonesia. Recent share price: $13.84.
Frontline (FRO). The international shipping company operates seaborne transportation of crude oil and oil products. It possesses the industry’s most contemporary fleet with more than 80 giant tankers, some as long as three football fields and capable of carrying two million barrels of oil. The Cypress-based company, which sails in the Arabian Gulf, West Africa, the North Sea and the Caribbean, can charge from $35,000 to more than $100,000 a day depending on the duration of the contract and fluctuations in the oil market. Frontline pays out more than half its earnings and cash flow as dividends, and it recently offered a dividend yield of 12.15%. Recent share price: $16.05.
*Performance figures are through February 28, 2025, and courtesy of Morningstar, Inc.
