Vanguard says buy more bonds than stocks over the next decade. Top Wall Street banks are already on board.

Vanguard’s ideal portfolio for the next 10 years looks pretty shocking at first glance.

As of earlier this week, the asset manager recommends having 70% of your money in bonds and 30% in stocks, a much more conservative approach than the classic portfolio of 60% stocks and 40% bonds.

But the firm’s downbeat long-term outlook for stocks is essentially another iteration of the message top Wall Street banks have been sending since last year, and a question of simple math: Stocks are expensive, and are therefore likely to underperform government bonds over the next decade.

Goldman Sachs’ David Kostin made waves last October when he made a similar point in a client note.

“The S&P 500 has roughly a 72% probability of trailing bonds and a 33% likelihood of lagging inflation through 2034,” Kostin wrote at the time.

And Morgan Stanley’s Mike Wilson told Business Insider in December that he sees horizontal average returns for the benchmark stock index over the next decade.

“That is a very common view, that given where valuations are today, over the next 10 years, the returns from point A to point B will be basically flat-ish, and on a real basis, maybe negative,” he said.

Valuations are key and are the crux of Wilson, Kostin, and Vanguard’s dreary outlooks. Historically, when the S&P 500’s Shiller price-to-earnings ratio has been in the high 30s, like it is now, annualized 10-year returns have been poor and potentially even negative.

Here’s a chart that Invesco put out in March showing the relationship going back to 1881. The dark blue line shows the Shiller PE ratio — which measures current stock prices versus a 10-year rolling average of earnings — and the pink line, which is inverted, shows the S&P 500’s annualized returns over the previous 10 years.

Below is another look at the relationship since 1983. Over that time, starting valuations have been able to explain 78% of the S&P 500’s returns during the following decade. In other words, valuations matter a ton when it comes to long-term returns.

When the Shiller PE ratio has been around 37 in the past — as it is now and was in March — following 10-year annualized returns have been anywhere from negative to a few percent per year.

In the context of bond yields, the outlook for stocks becomes even dimmer. Vanguard says bonds should deliver 4-5% average returns over the next 10 years. Risk-free 10-year Treasurys currently offer 4.2% yields. So, why would you put your money into risky stocks if you’re going to get the same, or even worse, returns as you’d get in bonds guaranteed by the government?

High valuations can present a risk for investors because they reflect lofty investor expectations for future earnings perfromance. If that performance doesn’t live up to the hype, things can go downhill. And if it does meet expectations, investors had already priced that upside in.

Of course, just because high valuations have been a harbinger of bleak returns in the past doesn’t necessarily mean that it will be the case this time. Maybe AI will really be a game changer. Plus, any pullback in valuations in the years ahead could present a better opportunity for forward long-term returns.

But there’s a long and reliable track record between stock performance and starting valuations, so ignore it at you’re own risk. Again, though, this outlook Vanguard and the banks have expressed is over a 10-year period — a very specific timeline that may have no significant implications for you if you plan to simply hold your stocks for multiple decades to come.