The investment bank predicts the S&P 500 will generate a 3% annual nominal total return through 2034, after posting a 13% annual total return over the previous decade.

Goldman Sachs’ reasoning is that the U.S. market is extremely concentrated — near its highest level of concentration in 100 years — a characteristic the investment bank says has historically been associated with greater realized volatility.

“The current extremely high level of market concentration is one of the main impediments to our return forecast,” the analysts said. “If our model were to exclude this variable, our baseline return forecast would be roughly 4 percentage points higher (7 percent instead of 3 percent).”

What's more, the investment bank cited the rise of "superstar" firms with economies of scale, such as today's mega-cap tech stocks, which has caused the S&P 500 to trade at a significantly inflated P/E ratio.

Speaking to InvestorDaily, AMP's chief economist, Shane Oliver, said he broadly agreed with Goldman Sachs' analysis but expected gains of around 4 to 5 percent over the 10-year period.

"I agree there's certainly a risk," Oliver said. "You can't ignore that so much of the market is concentrated in a handful of stocks," he said, but opined that concerns about the valuation of the U.S. market are not new.

"We've been talking about high concentration in the US equity market for a long time."

Oliver believes investors should be on the lookout for the possibility that something could come along that knocks the U.S. market off its perch. This again, he said, is nothing new.

“They are [Goldman Sachs] simply saying, “Well, the potential for the US stock market over the next decade was a lot less than it was over the last decade.” That's what they're saying, and I tend to agree with that.

"And if investors are actively managing their portfolios and thinking about a 10-year horizon, there is reason to reduce exposure to the US because it seems hard to see the Magnificent Seven continuing to do as well as they have been."

Ultimately, Oliver agrees that returns will be much lower than they have been, but he says the Goldman Sachs forecast is nothing more than "useful information." He warned that trying to time a possible decline was "difficult".

"I think it gives us useful information from a 10-year view -- expect lower returns in the US."

“Consider greater exposure to other markets, including our market. But it's going to be hard to time that, and you can't rule out the possibility that the U.S. will have a pretty significant correction at some point," Oliver said.

In its analysis, Goldman Sachs acknowledged that its 3% annualized return forecast over 10 years is well below the consensus average of 6%.

The investment bank also highlighted the "large amount of uncertainty" inherent in forecasting the future and pointed to several risks to its forecast. Among those risks is the possibility that short-term and long-term interest rates could fall back to historically low levels, which would create upside risk.

What's more, Goldman Sachs said that if faster-growing and more profitable companies enter and remain in the index over the next decade, "returns will be enhanced as the index benefits from an improvement in its overall growth and profitability profile ".

Other risks to the forecast include a large increase in labor productivity over the forecast period, which in turn will boost earnings and overall returns, and a new generation of investors with new risk tolerance profiles.

No panic for instos

Reflecting on how the potential underperformance of the S&P 500 over the next decade could affect Australia, Oliver said local institutional investors would refrain from acting "fast".

Namely, while Oliver expects investments like pension funds to take note of this forecast, along with a host of other forecasts, including their own, he doesn't expect them to act rashly.

“As I've done throughout my career, I've seen a few times that people come out and say things like that, and the market just keeps going. And of course, down the track, all of a sudden he's proven right, but the correction comes all of a sudden with a big drop in the market,” Oliver said.

“Just trying to time it is going to be tough. This does not mean that the average return each year for the next 10 years will be 3 percent. It is extremely unlikely that you will get anything like this. What they are saying is that the average over the next 10 years will be about 3 percent.

Oliver added that if the US tech space continues to develop favorably, market gains could continue for some time.

"That is why there is a danger of reacting hastily to such forecasts.