Macroeconomics

Market Pulse February

February 7, 2025 | 5 minute read
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Author(s)
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James Ashley
International Head of Strategic Advisory Solutions
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Simona Gambarini
Senior Market Strategist, Strategic Advisory Solutions
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Candice Tse
Global Head of Strategic Advisory Solutions
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John Tousley
Global Head of Market Strategy, Strategic Advisory Solutions
While the post-COVID inflation spike has largely subsided, concerns over positive data surprises, tariffs, immigration curbs, and debt sustainability may fuel concerns of renewed US inflation and keep rates higher for longer. We see potential opportunity to hedge these risks through US equities, real estate, and private infrastructure.
Macro Views
Policy
Policy

2025 may be a year of major policy movement directly influencing macro and market conditions. Tariffs announcement by President Trump and the retaliatory response from affected countries might create headwinds for global growth and disinflation. While Europe is reacting to developments in the US with plans to drive investment, political instability in France and a likely leadership transition in Germany create an uncertain outlook.

Growth Divergence
Growth Divergence

The US economy is in the sweet spot of healthy growth and gradual disinflation, supported by solid consumer spending and increased private investment. However, Euro area growth may be challenged due to trade uncertainty, contracting manufacturing sector and rising Chinese competition.

Monetary
Monetary

Despite varied progress in reducing inflation globally, all G10 central banks (ex-BoJ) are expected to ease rates in 2025, albeit with highly variable trajectories. GIR expects the Fed to deliver two 25bp cuts this year, in June and December, and the ECB to deliver sequential 25bp cuts until the policy rate reaches 1.75% in July 2025, although faster and deeper cuts are possible if growth turns out weaker than we project.

February Chart of the MonthFebruary Chart of the Month

Source: Goldman Sachs Investment Strategy Group and Goldman Sachs Asset Management. As of February 3, 2025. Chart shows S&P 500 performance following the first cut in prior Fed cutting cycles, in addition to the total amount of cuts/hikes issued by the Fed in each specific period. Past performance does not predict future returns and does not guarantee future results, which may vary.

Market Views
Global Equities
Global Equities

We believe US equities will continue to perform driven by strong earnings prospects and easier monetary policy. However, volatility may stay elevated in the short term as investors assess the sustainability of AI investments. In Euro area, political and trade uncertainty along with tepid growth prospects might limit further equity gain. Elsewhere, EM equities continue to be challenged by a strong US dollar and high trade uncertainty.

Rates
Rates

We expect major central banks (ex-Japan) to ease policy by more than what is currently priced. That said, longer-duration rates may face continued pressures on the back of resilient US growth, sticky last mile inflation, and fiscal concerns. We continue to expect higher term premia and steeper yield curves in this cycle.

Global Credit
Global Credit

In DM, we believe US carry is secure but see more value in Euro markets given less constrained valuation and improving investors’ sentiment. We see opportunities in EM despite Trump risk; in particular, we like Latin America given high carry and value combined with low sensitivity to China risk. 

Asset Class ForecastsAsset Class Forecasts

Price targets of major asset classes are provided by Goldman Sachs Global Investment Research. Source: “Markets are moving from tech to tariffs” – February 3, 2025.

 

Source: Goldman Sachs Global Investment Research, Goldman Sachs Investment Strategy Group and Goldman Sachs Asset Management. As of February 3, 2025. “We/Our” refers to Goldman Sachs Asset Management. The macro and market views expressed may differ from those of GIR and other divisions of Goldman Sachs and its affiliates. See end of page for additional disclosures. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved. Past performance does not predict future returns and does not guarantee future results, which may vary.

The Last Mile

Inflation normalization is proving slow as both the magnitude and velocity of improvement diminish. Structural factors and tariff uncertainty will make the data in 2025 noisy. While the post-COVID inflation spike has largely subsided, concerns over positive data surprises, tariffs, immigration curbs, and debt sustainability may fuel concerns of renewed medium-term US inflation and keep rates higher for longer. We see opportunities for investors to hedge these risks through US equities, real estate, and private infrastructure.

US Equities Have A Strong History of Outperforming Inflation

Commodities are often perceived as a good inflation hedge, though equities have been a more effective and reliable protection over time. Stocks have demonstrated a higher frequency of outperforming inflation across all investment horizons. Commodities tend to hedge inflation as central banks tighten and real rates rise. This has already occurred. We believe the more effecting strategy going forward would be to hold positions that can pass through costs and benefit from stable economic growth.

US Equities Outperform Inflation

Source: Goldman Sachs Investment Strategy Group and Goldman Sachs Asset Management. As of 3Q 2024.

More Data, More Power

We maintain our view that significant investment in private infrastructure and real estate should come as a byproduct of the surge in data center demand, driven by the rise in cloud computing and AI. It is also evident that power consumption outside of AI growth is similarly at an important inflection point. We view real estate debt as a way to capitalize on these trends while potentially hedging against sticky inflation and higher rates, mainly due to the asset class’s floating rate structure and shorter duration leases.

More Data, More Power

Source: IEA, EuroStat, British Department for Business - Energy & Industrial Strategy, and GS Asset Management. As of December 31, 2022.

Infrastructure Shines When Inflation Overshoots

Furthermore, in a world of elevated inflation and greater macro uncertainty, we see infrastructure as another attractive diversifier as infrastructure businesses tend to be more resilient through economic cycles and higher inflationary periods, as seen through the asset class’s outperformance during periods of high inflation since 2000. This, coupled with trends such as increased defense spending, AI innovation, and the push for decarbonization, should act as a major tailwind for the asset class, in our view.

Annualized Return During Periods With Core Inflation Exceeding 2.4% YoY since 2020

Source: EDHEC Infra300, NFI-ODCE, S&P500, Bloomberg Barclays, BLS and GS Asset Management. As of September 30, 2024.

Author(s)
Avatar
James Ashley
International Head of Strategic Advisory Solutions
Avatar
Simona Gambarini
Senior Market Strategist, Strategic Advisory Solutions
Avatar
Candice Tse
Global Head of Strategic Advisory Solutions
Avatar
John Tousley
Global Head of Market Strategy, Strategic Advisory Solutions
Market Pulse February
The Market Pulse highlights the latest market developments and trends, coupled with insights on portfolio construction.
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