Goldman Sachs Reveals Its Second Half 2024 Macro Outlook

The Goldman Sachs (NYSE:GS) midyear macroeconomic outlook was discussed by key members of the firm, and they all agree that 2024 is off to a good start. However, they believe that the backdrop going forward could see much more volatility. 

The podcast featured Christian Mueller-Glissmann, Head of Asset Allocation Research at Goldman Sachs Research, along with Alexandra Wilson-Elizondo, Co-Chief Investment Officer of Multi-Asset Solutions at Goldman Sachs Asset Management. The two were interviewed by Allison Nathan, who was podcast host of Goldman Sachs Exchanges. The conversation was recorded on June 14. 

The world’s second-largest investment bank has a cautiously optimistic outlook that includes solid growth and tapering inflation. Interest rate cuts are also expected, which could be positive for investors. It believes the best approach is to focus on maintaining a balanced and risk-aware investment strategy amid a supportive yet potentially volatile macroeconomic climate. 

Market Valuation and Outlook 

The panelists discussed the impact of AI on markets, noting that optimism around AI has driven up valuations. They suggested that while AI optimism is currently priced in, further advances could lead to a re-evaluation of market valuations, pushing the targets even higher. 

Christian Mueller-Glissmann noted that while valuations are high, they are not excessive when considering the high return on equity (ROE) in the S&P 500 (SPX). He also pointed out that the current economic cycle shows late-cycle characteristics, such as low unemployment rates and high profit margins, which support equities.

Alexandra Wilson-Elizondo built on the valuation discussion by alluding to how AI can generate business efficiencies. She believes the “long-term returns are in line with the long-term average.” But if investors factor in AI-related growth in productivity, returns could begin to accelerate.

Asset Allocation Recommendations 

Both Mueller-Glissmann and Wilson-Elizondo recommended maintaining a risk-on stance but with a focus on hedging strategies due to the expected volatility. They emphasized the importance of diversification across asset classes, including equities, bonds, and real assets. The optimal portfolio composition, according to Goldman, may be closer to a 33/33/33 (equities/bonds/real assets) portfolio than a traditional 60/40 mix (equities/bonds). 

The one-third allocation in equities was highlighted as having a bias toward growth stocks to capture innovation across various sectors such as AI, renewable energy, and healthcare. Despite the current high valuations of growth equities, they are considered capable of offering attractive returns if the bullish conditions persist. 

The one-third allocation in Bonds acts as a diversifier that helps maintain stability and offset risks associated with the economic environment. 

In addition, the one-third in real assets should help address concerns about inflation, volatility, and stagflation. The real assets slice of the portfolio can include infrastructure, real estate, commodity equities, or companies with strong pricing power. 

Stock Market Behavior 

One key theme in the analysts’ recommendations is the importance of companies with high returns on invested capital (ROIC). These companies are seen as having the potential to generate strong returns for investors, even in a challenging economic environment. 

Neither guest thinks it will be as consistently positive in the second half as it’s been in the first half of 2024. One measure is volatility, which they expect will trend higher. They point to the currency markets that are reflecting global political drama. With elections across many areas of the world, “we need to continue to expect the unexpected here,” according to Wilson-Elizondo.

The analysts also highlighted the potential for growth in certain sectors, including technology and healthcare. They suggest that companies in these sectors may benefit from ongoing trends, such as the increasing use of technology in various industries and the growing demand for healthcare services. 

Political and Election Risks 

The upcoming U.S. election and other global political events were brought up several times as potential sources of volatility. Goldman Sachs emphasizes that policy changes stemming from election outcomes can have significant implications for various sectors, such as healthcare, technology, and energy. They also note the importance of monitoring fiscal policies, regulatory changes, and trade relations that could shift based on the election results. 

Additionally, the discussion touches on how different administrations may prioritize different economic agendas, which can lead to variations in government spending, tax policies, and regulatory frameworks. This political uncertainty is seen as a key factor that investors need to consider when making asset allocation decisions.

Key Takeaway – Expect Increased Volatility

The Goldman Sachs midyear economic outlook suggests a complex economic landscape characterized by robust market performance but increased volatility. Investors are advised to maintain a diversified portfolio that balances risk and hedges against potential market shocks while being prepared to adjust strategies based on evolving economic conditions and policy changes.