Healthy Year-End Macroeconomics, Markets and Consumers Are Driving Opportunities in Fixed Income and US Equities

Private Markets Also Offering Diversification and Potential for Strong Returns

Goldman Sachs Asset Management Analysis Points the Way for Global Investors in 2025

(New York, NY, November 20, 2024) – Year-ending analysis released by Goldman Sachs Asset Management, 2025 Outlook: Reasons to Recalibrate, shows that interest rate easing cycles, geopolitical risk, and post-election policies provide compelling reasons for investors to refocus.

“After a couple of years of high inflation and interest rates, macroeconomic imbalances have diminished,” said Alexandra Wilson-Elizondo, co-Chief Investment Officer of Multi-Asset Solutions at Goldman Sachs Asset Management. “Inflation fell without a global recession, and central bank easing cycles are underway. Rate cuts should progress across most developed and emerging markets in 2025, albeit on different timelines, before settling at a higher level than the previous low-rate world.”

“We stay cautiously optimistic that major economies can achieve a new equilibrium of sustained economic growth as central banks gradually ease, but tail risks could knock things off balance. With political uncertainty settled in the US, economic growth should be sustainable as the Fed continues to ease. However, unexpected increases in inflation from potential tariffs, as well as looser fiscal conditions, could prompt the Fed to pause rate cuts,” Wilson-Elizondo continued.

The report, Goldman Sachs Asset Management 2025 Outlook: Reasons to Recalibrate, is here.

Goldman Sachs Asset Management’s views on potential paths forward suggest that utilizing a broad, diverse, and global toolkit across public and private markets may help to deliver positive outcomes and navigate risk. Ample reasons for global investors to land on bonds, broaden equity horizons, explore alternative paths, and pinpoint opportunities amidst disruption include:

• US Soft Landing in Sight: The US economy remains resilient, although labor market data have sent mixed messages. We lean to a soft landing against a backdrop of late-cycle opportunities and lingering tail risks. If inflation continues to cool, additional Fed rate cuts may unfold in 2025, potentially resulting in an easing cycle that could conclude at year-end. The labor market, health of the consumer, and policy direction and sequencing of the incoming administration will be critical economic factors.
• More Cuts Across Developed Markets: Slowing UK growth and normalizing inflation may result in a quicker pace of cuts. Central banks, including the Bank of Canada and Sweden’s Riksbank, are also moving in a dovish direction. Japan remains an outlier.
• Emerging Market Easing to Broaden: A more dovish Fed opened the door to easing across emerging markets (EM). South Korea, Thailand, South Africa, and Mexico cut rates, and EM monetary policy cutting should broaden in 2025. EM growth has remained relatively resilient, with inflation far from 2022 peaks.

 

Landing on Bonds

When the Fed cuts rates, history suggests the bond market is where investors should want to be.

Moving away from cash to fixed income should prove rewarding in 2025, potentially with broad-based fixed income gains. Investors must understand the intricacies of each segment to ride the easing cycle, capture income, and employ a dynamic investment approach across sectors and regions. Active investment strategies, diversification, and strong risk management will be paramount.

While the US election has widened the range of possible economic outcomes, we still expect the Fed to cut rates again in December and early 2025. The path thereafter will depend on the policy agenda enacted by the new administration. The main fixed income risk is renewed inflation, which could slow down the pace of easing.

“Our analysis suggests that companies in the investment grade credit market can remain resilient in 2025, much like their resilience to higher rates in recent years. This reflects a healthy starting point for credit metrics and the ability to be more selective about new investments or M&A activity. In 2025, we will watch for a potential rise in bond supply driven by elevated ‘animal spirits,’ leading to debt-funded corporate activities such as aggressive buybacks or M&A, which could impact the current strong credit metrics,” said Simon Dangoor, Head of Fixed Income Strategies at Goldman Sachs Asset Management.

“Robust performance in securitized credit, characterized by spread tightening across collateral types and the capital structure, should continue into 2025. CMBS is most compelling, with spreads in AAA- and BBB-rated securities appearing attractive relative to fair value assessments. Investment grade bonds also stand out as an option for enhancing returns, striking a balance between earning income and managing risk,” said Lindsay Rosner, Head of Multi-Strategy Fixed Income at Goldman Sachs Asset Management.

Dynamic investment strategies can strategically complement core bond allocations in 2025 across different interest rate markets. We favor agile strategies with seamless sector, geographical, and issuer rotation in response to market opportunities.

Income opportunities also can be found in the green bond market, one of the fastest-growing segments in fixed income, to capitalize on higher yields. Opportunities will grow as issuers from more sectors and countries access the market for financing. The diminishing green premium means investors no longer need to compromise on income or return potential by going green.

 

Broader Equity Horizons, US and International

With the US equity market near its highest concentration in 100 years, the stock market’s return structure is expected to broaden. Mega-cap fundamentals look solid, but the level of market dominance is not sustainable. With S&P 500 index performance strongly dictated by the prospects of a few stocks, passive allocations to US large cap indices may pose risks.

Despite this acute equity concentration risk, US equities remain most attractive. A well-rounded, differentiated approach in the US large and mid-cap space in 2025 may lead to positive returns. Active management can help identify less-obvious businesses with quality attributes of durable growth, attractive valuations, excellent management teams, and compelling financials.

After the election, US stocks moved higher, reflecting investor enthusiasm for domestically focused names. A new Trump Administration’s legislative agenda brings with it the potential for pro-growth measures including lower corporate taxes and lighter touch regulation.

“There is a potential inflection point for small caps, driven by rate cuts and more domestic trade policy. US small caps have often outperformed large caps when central banks started rate cuts, especially in soft landings, and smaller companies may benefit from rate reductions as interest payments decrease. The less liquid, more diverse, less thoroughly researched nature of the small cap market suits active investment strategies,” said Greg Tuorto, Head of Small/SMID Cap Equities at Goldman Sachs Asset Management.

As for equity indices covering Europe and Asia, technology is a smaller part. Financials are better represented, including European banks – which recently outperformed the Magnificent 7.

“Outside the US, healthcare, clean energy, and luxury goods companies that do not have a US equivalent appear attractively priced. Across non-US developed markets, we see opportunities in dividend-paying companies with sustainable returns on invested capital, strong cash flow generation, a track record of capital discipline, and consistent payout histories. They may help investors mitigate volatility and market drawdowns, which have historically been sharper in international markets than in the US,” said Alexis Deladerrière, Head of International Developed Market Equity at Goldman Sachs Asset Management.

“With strong corporate earnings growth at fair valuations, EM equities should bring significant opportunity. Asian equity markets are diverging with risks around China shares growing on the prospect of new tariffs, while India still has strong fundamentals. Elsewhere, markets like Taiwan and South Korea contain semiconductor companies crucial to AI development. Japanese equities have been driven by strong earnings, corporate governance momentum, and an inflationary environment shift, but with headwinds. Countries with favorable demographics, such as Mexico, are also compelling,” said Ashish Shah, Chief Investment Officer of Public Investing at Goldman Sachs Asset Management.

 

Private Equity & Private Credit

Private markets continue to evolve and attract a broader base of investors seeking to complement traditional market exposures. A more balanced economy in 2025 could spur dealmaking and ease some valuation and liquidity pressures. However, a more constructive macro picture will not be a magic bullet, as some asset types will remain better positioned than others. As investors digest the longer-term implications of recent election results, private market investments often span multiple administrations, so over-indexing to a current one can be an unintended source of risk.

“A stabilizing macro backdrop and a recalibration of investor expectations should be a catalyst for a more normalized environment for private equity buyouts in 2025. We see signs that this process is already underway, positioning the industry better for exits and new capital deployment, albeit with some parts of the market more compelling than others. Operational value creation should remain the key driver of returns,” said Brad Gross, Global Co-Head of Private Equity at Goldman Sachs Alternatives.

In venture capital and growth equity, valuations and growth expectations have normalized in many parts of the market, and the muted fundraising environment of the past two years brought down the level of dry powder down from 2023 records. These factors make for a more constructive environment for deploying new capital in an asset class that offers access to innovative companies in the highest-growth phase of their trajectories. There is also a growing need for growth equity capital as venture-backed companies stay private for longer.

Supply/demand factors have also been driving dynamics in private credit. Spreads have tightened in recent quarters as investors sought greater exposure to floating-rate credit, across both syndicated and private markets. Many borrowers refinanced, in some cases switching between public and private sources, in others repricing loans with existing lenders. Some market participants have observed loosening lender protections, as lenders compete on both price and terms. This may ultimately make lenders more vulnerable if companies experience stress.

“Declining rates may therefore paradoxically prove constructive to private credit, mitigating the supply/demand imbalance and normalizing spreads,” said Greg Olafson, Global Head of Private Credit at Goldman Sachs Alternatives.

“An equilibrium between demand for public and private credit should arise as well, in which companies will choose between the lower cost of capital available in public markets versus a more tailored capital structure and financing solution in private markets. Overall, we anticipate ongoing interest in private credit and expect interest to expand across areas, such as directly originated investment-grade credit, and asset finance,” Mr. Olafson said.

 

Real Estate Activity Should Accelerate

The levels and trajectories of global interest rates are critical drivers of value for assets, such as real estate, that price based on yield characteristics. With most central banks lowering rates, following an unprecedented period of rate increases, we are seeing improved liquidity in most sectors, trading volumes on the rise, and values increasing. Continued appreciation will be correlated, in part, to future easing – and will be amplified in sectors with favorable supply/demand fundamentals. We are incredibly optimistic about the investing environment for property in the years ahead.

“As in other asset classes, property fundamentals drive returns through market cycles. The dynamics observed in real estate today are driven by the secular trends of demographics, technology, and the drive towards sustainability, all of which should continue to shape global real estate demand. The attractiveness of assets reflecting these themes will differ by region and individual asset quality,” said Jim Garman, Global Head of Real Estate at Goldman Sachs Alternatives.

 

Sustainability: Sharper Focus on Financial Returns

Re-focus is emerging on materiality, with investors going “back to basics” to sharpen focus on financial returns. It is the view of Goldman Sachs Asset Management that the broadening investable universe will lead to greater real-world impact and heightened performance benefits linking sustainability with stock performance and quantifiable impacts. Decarbonizing the global economy will require channeling capital into sectors with higher emissions – such as producers of cement, chemicals, and steel – to make real progress.

 

About Goldman Sachs Asset Management

Goldman Sachs Asset Management is the primary investing area within Goldman Sachs (NYSE: GS), delivering investment and advisory services across public and private markets for the world’s leading institutions, financial advisors, and individuals. The business is driven by a focus on partnership and shared success with its clients, seeking to deliver long-term investment performance drawing on its global network and deep expertise across industries and markets. Goldman Sachs Asset Management is a leading investor across fixed income, liquidity, equity, alternatives, and multi-asset solutions. Goldman Sachs oversees approximately $3.1 trillion in assets under supervision as of September 30, 2024. Follow us on LinkedIn.