Checking Investment Biases Heading Into Election

This month, Goldman Sachs made headlines with a fresh forecast projecting the S&P 500 will see 3% in annualized returns in the next decade. The outlook stopped many of us in our tracks, because it’s a far cry from where we’ve been.

A look at the S&P 500’s returns in the past decade explain why we’ve been so bullish, with annualized returns sitting around 13%. Look at this chart:

Suddenly, confidence in soft landings and another wave of equity performance gave way to headlines everywhere warning us of an upcoming “lost decade” or “dead decade” given Goldman Sachs’ outlook.

Across market commentaries, we were called to put our biases in check — recency bias, domestic bias — which could be leading us to more risk exposure than the macro backdrop may warrant going forward. Is Goldman Sachs right? Should we brace for low returns?

The tough thing about forecasts is that they are educated guesses, but guesses nonetheless. No one has a crystal ball. But we do know that strong U.S. equity performance has led to concentration risk.

As an anecdotal example, in a webcast with the team at Fidelity this week, we learned through their Portfolio Quick Check data that investors are heavily allocated to U.S. stocks. Domestic bias is real. About 30% of advisor portfolios, according to the data, have zero exposure to international stocks. That’s almost a third of portfolios (in this research’s sample) that have only U.S. stocks in their equity sleeve. All equity risk eggs are in one basket, and often, heavily tilted toward recently strong-performing large caps.

What’s more, the ones that do have international exposure allocate more than 80% of that position to developed markets only, according to the data. Anyone who calls for equity diversification talks about the benefits of a global approach. Many investors possibly overlooked that in recent years.

On the fixed income side, allocation to bonds in advisor portfolios is at their lowest levels since 2022, the data shows. And that position hasn’t really budged even in recent months, even as fixed income positive outlooks and calls to redeploy cash sitting in the sidelines gather momentum.

It turns out that all the “60/40 is dead” conversations we’ve had in recent years may have had a real impact on how advisors and their clients position their income sleeves, trimming exposure to bonds significantly. We’ve seen alternative sources of income become hugely popular through vehicles like options- and equity-based income ETFs.

In a recent Fixed Income Symposium we hosted at VettaFi with multiple asset managers, it was abundantly clear that the opportunity in fixed income going forward is compelling. Many of the managers said bonds will behave like bonds as ballasts of diversification with correlations — or lack thereof — to equities going back to normal. Quality and duration are now an investor’s friend, many said. And Goldman Sachs, in its recent forecast, said “bonds are 72% likely to outperform stocks over the next decade.” Are advisors (and clients) positioned for that?

With the U.S. presidential election taking place next week, we will be paying attention to very little else. The market is looking for some clarity on what comes next. Campaign trails have suggested very different paths to the future, so there’s a lot to consider.

Until we learn the outcome of the election, and hopefully some clarity emerges, perhaps it’s a good time to kick the tires on current positioning and investment biases as we prepare for 2025 under new leadership.

If you’d like to watch the insights from our Fixed Income Symposium, here’s a link to a replay of the event.

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