Market Pulse September
Macro Views
Recent bouts of weakness in the US labor market have heightened fears among many investors of a potential US recession. However, our economists in GIR place the odds of a recession occurring in the next twelve months at just 20%, because 1) the rise in unemployment appears to be supply-driven, 2) GDP growth remains firm, and 3) the Fed has up to 525bps of easing capacity.
In the US, the soft PCE report in July and the downward revisions to the Q2 estimates should provide further evidence to the FOMC that disinflation is being sustained. Meanwhile, in the Euro area, the latest negotiated wage data showed a meaningful deceleration in Q2 suggesting that wage pressures have likely peaked.
Minutes from the July FOMC meeting and recent commentary from Fed Chairman Jerome Powell have further solidified the likelihood of a September cut. We expect the Fed to reduce the policy rate by just 25bps at its September meeting, barring further deterioration in the labor market. In Europe, the ECB is likely to deliver another 25bps rate cut in September while the BoE may wait until November.
Vice President Kamala Harris has continued to gain ground on Former President Trump since becoming her party’s official nominee in August. Although we continue to see significant uncertainty around the eventual outcome of the upcoming election, Harris now leads Trump in both national and swing state polling.
Source: St. Louis Federal Reserve. As of July 31, 2024. Chart shows the unemployment rate and job openings rate from June 2009 through June 2024. Each plot reflects the unemployment rate (x-axis) and job openings rate (y-axis) for each month of data.
Market Views
2Q earnings came in better than expected in DM markets with Japanese corporates reporting bigger EPS surprises than their US and European peers. In Europe and the US, Cyclicals were the laggards, pulling Q2 beats and FY24 EPS momentum lower. In general, we conclude that consumer fears are greatly exaggerated with positive real income growth being supportive. That said, firms turned more cautious in their forward guidance citing economic and political uncertainty as key risks.
Our colleagues in GIR believe the S&P 500 is fairly valued at 5600, inclusive of 2025 earnings per share and valuation estimates of $256 and 22x, respectively. Considering current valuation levels, we expect forward equity returns to be commensurate with earnings growth over the medium-term. In the short-run, however, the top-heavy composition of the market may allow a handful of companies to drag the S&P 500 meaningfully above/below our fair value estimates. We see a near-term path up to 6300 should AI-proximate mega-cap exceptionalism continue. Conversely, should earnings, guidance, or the monetization of AI productivity falter, these same companies could pull the market lower to 4800.
August’s brief yet powerful drawdown serves as a reminder that while the macro backdrop remains supportive, other market forces can amplify price activity. These include challenged liquidity, bouts of forced selling by levered ETFs, and breaking through technical thresholds for systematic traders. While these pressures have ameliorated of late, during the August 5th selloff the market absorbed the year’s 5th highest daily volume with its single lowest daily liquidity.
Source: Price targets of major asset classes are provided by Goldman Sachs Global Investment Research. Source: “Global equities, up 2.4% in August, are making new highs” – September 2, 2024.
The content above is sourced to MSCI, GS Global Investment Research (GIR), and Goldman Sachs Asset Management. As of September 2, 2024. “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 page 4 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 guarantee future results, which may vary.
Investment Solutions: Sun Still Rising on Japanese Equities
The unwinding of yen carry trades has weighed on Japanese equities recently, prompting the largest daily sell-off since 1987. While further strengthening of the yen and the uncertainty around a general election may result in continued market volatility, we think that the case for a strategic allocation to Japanese equities remains strong. The Japanese economy is experiencing a new dawn, which coupled with ongoing corporate governance reforms, should provide support to Japanese equities, especially those which are domestically-orientated.
Source: Macrobond, and Goldman Sachs Asset Management. As of August 28, 2024.
Source: Goldman Sachs Global Investment Research, and Goldman Sachs Asset Management. As of August 28, 2024.
Source: Bloomberg, Daiwa Institute of Research, and Goldman Sachs Asset Management. As of August 28, 2024.
We/Our” refers to Goldman Sachs Asset Management. “Down, Not Out” Notes: Source: Macrobond and Goldman Sachs Asset Management. As of August 28, 2024. Chart shows the daily percentage change of the TOPIX Index from January 21, 1976 to August 28, 2024 . It highlights the biggest drawdowns including a 15% drop on October 20, 1987 and a 12% decline on August 5, 2024. “A New Dawn for the Economy” Notes: Source: Goldman Sachs Global Investment Research and Goldman Sachs Asset Management. As of August 28, 2024. Chart shows the year-over-year percentage change in nominal GDP growth for the US, Euro Area, United Kingdom, and Japan. The chart compares historical growth rates from 2010-2019 with projections from Goldman Sachs Investment Research (GIR) for 2025. This chart emphasizes regional economic outlooks and potential growth trajectories, particularly in Japan. “Increasing Corporate Value” Notes: Bloomberg, Daiwa Institute of Research, and Goldman Sachs Asset Management. As of August 28, 2024. Chart shows the evolution of corporate governance in Japan by comparing the Price-to-Book (P/B) value, share buybacks in trillions of yen, and the number of cross-shareholding issues between 2012, 2019, and the latest available data. The chart communicates the impact that governance reforms have on corporate value and shareholder returns, which reflects an ongoing shift towards increased corporate transparency and efficiency. The latest TOPIX P/B Value data is as of July 31, 2024, and the latest Share Buybacks (Yen, tn) data is annualized with the existing 2024 data. *Latest data for the number of cross-shareholdings issues is as of December 2022. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There is no guarantee that objectives will be met. There can be no assurance that forecasts will be achieved. Please see additional disclosures at the end of this page. Past performance does not guarantee future results, which may vary.
