Investing in the S&P 500 over the last decade has proved to be a massively lucrative strategy. Including dividends, the US’s flagship index has generated a 320% total return since February 2016 – the equivalent of 15.4% a year.
In terms of money, that means anyone who’s been drip-feeding £500 each month into a low-cost index tracker during this time has gone on to build an impressive £141,000 portfolio!
But with US stocks now trading near record highs, is the index still worth considering today? And how much money could investors make over the next decade?
10-year forecast for the S&P 500
The analyst team at Goldman Sachs has been carefully scrutinising the current condition of the US stock market. And while it remains bullish overall for the economy, it thinks the S&P 500 could prove less explosive in the coming years.
Goldman’s top strategists are predicting some robust GDP growth, laying the foundation for widespread revenue growth. And with companies investing heavily in digitalisation, automation, and new AI-driven efficiencies, the team expects profit margins to simultaneously improve.
The problem is, most of these expected benefits are already baked in to today’s valuations. And while there are some exceptions, the price-to-earnings ratio of the S&P 500 as a whole now stands at 29.4 – almost double its long-term historical average.
As such, the forecast annualised returns from the S&P 500 over the next decade are only 7.7%. That’s still significant. But it means that investors drip-feeding £500 a month into index funds may ‘only’ end up with £89,960.
Aiming for larger returns
Despite this, Goldman has highlighted several S&P 500 stocks that nonetheless still outperform. And the list includes ServiceNow (NYSE:NOW).
Despite strong financials, fears of AI disruption have dragged ServiceNow shares down close to 50% over the last 12 months. Yet if Goldman’s thesis is correct, the stock could potentially surge back from $105 to $216.
As a quick introduction, ServiceNow provides cloud-based enterprise software that enables businesses to automate and connect their workflows across IT, HR, customer service, cybersecurity, and all other critical departments.
But to combat the potential threat of longer-term AI disruption, the company has unveiled its own suite of AI tools and agents that will automatically handle any routine work, escalating only complex issues to humans, and taking automation to the next level.
Combining this with solid fundamentals, earnings that are beating expectations, and a much more reasonable valuation, a buying opportunity may have just emerged.
What to watch
While Service Now shares are certainly a lot cheaper, they’re still on the richly priced side. If the company can deliver on the promises made for its new AI agents, then future potential rapid growth does indeed make today’s valuation attractive.
But it’s important to recognise that ServiceNow isn’t the only player in this space. And there’s some stiff competition aiming to deliver similar tools that could disrupt it before it has time to adapt.
If the company can’t evolve into an AI-driven ecosystem, customers may start leaving it behind. In other words, there’s a lot of execution risk attached to this business. But as Goldman’s analysts have highlighted, if management delivers, the rewards could be substantial.
That’s why I think this S&P 500 stock deserves a closer look. And it’s not the only one that’s on my radar today.
