Asset Management Outlook 2025: Broader Equity Horizons

This article is part of our 2025 Outlook: Reasons to Recalibrate.

Broader Equity Horizons

At the halfway point of 2024, we highlighted some potential opportunities for investors to broaden their horizons within and across equity markets. While the breadth of stock market returns has marginally improved in the second half of the year, equity market concentration remains near historic highs.¹ We expect the return structure of the stock market to broaden in 2025 against a backdrop of rate cuts and resilient economic growth, providing motivation for diversification across equity markets. Identifying undervalued and long-term opportunities in the US, internationally (both in developed and emerging markets) and across the market cap spectrum, may prove rewarding. In our view, heightened return dispersion and volatility will make an active investment approach, diversification and solid risk management essential.

US concentration risk: Getting more out of your core

The US equity market remains near its highest level of concentration in 100 years.² Large US tech companies have long been the most important driver of equity market returns, and for valid reasons: their earnings have outstripped those of the global market for more than a decade.³ However, since 2022, mega-cap outperformance has owed much to the hopes and aspirations about artificial intelligence (AI).⁴ In many cases, mega-cap fundamentals still look solid, and we believe AI is a transformational technology. In our view, the level of market dominance is not sustainable. With the performance of the S&P 500 Index strongly dependent on the prospects of a small number of stocks, passive allocations to US large cap indices may pose risks to broader portfolios.

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A well-rounded and differentiated approach to investing in the US large and mid-cap space may lead to positive return outcomes in 2025.”

Despite acute equity concentration risk, the US equity market remains one of the most attractive in the world due to the US’s resilient economic growth, persistent corporate earnings growth, and a strong culture of promoting innovation. If implemented, we believe lower corporate tax rates and lighter-touch regulation under a second Trump presidency would be favorable for US stocks. The need to rebuild US manufacturing capabilities also provides a tailwind for the “picks and shovels” of reindustrialization—companies designing, building and outfitting the “factories of the future”. These firms represent a large universe of investment opportunities, spanning several economic sectors.

As the market calls for broader participation, a well-rounded and differentiated approach to investing in the US large and mid-cap space in 2025 may lead to positive return outcomes. We believe active management can help identify less-obvious businesses with quality attributes of durable growth, attractive valuations, excellent management teams, and compelling financials. Rigorous stock selection combined with quantitative insights on quality, volatility and valuation metrics may help drive attractive risk-adjusted performance across sectors.

US equity market concentration remains near its highest level in a century

Source: FactSet, Compustat, Goldman Sachs Global Investment Research. As of September 30, 2024. Universe consists of US stocks with price, shares, and revenue data listed on the NYSE, AMEX, or NASDAQ exchanges. Series prior to 1985 estimated based on data from the Kenneth French data library, sourced from CRSP, reflecting the market cap distribution of NYSE stocks.

The case for international diversification

Beyond the US, developed equity markets across regions provide opportunities for differentiated exposures. For example, the technology sector accounts for a smaller proportion of equity indices covering Europe and Asia than US equity indices.⁵ Financials, by contrast, are better represented, including European banks which have recently outperformed the Magnificent 7. Areas of the market such as healthcare, green energy and luxury goods contain companies that either do not have a US equivalent or appear more attractively priced. Moreover, the return profile of the non-US market is quite distinct. In Europe, for example, dividends have historically been a much larger driver of the total return than in other markets. We believe there is upside potential for dividend growth given that European payout ratios remain below historical averages.⁶

Dividends have provided the majority of European equity total returns

Source: Worldscope, Datastream, Goldman Sachs Global Investment Research. As of October 31, 2024.

The international developed market equity universe is far from homogenous. The 21 developed markets captured by the MSCI EAFE (Europe, Australasia, Far East) Index, for instance, are not driven by a defined set of macro factors or an overarching theme.⁷ This heightens the importance of stock selection. Across non-US developed markets, we favor dividend-paying companies with sustainable returns on invested capital, strong cash flow generation, a track record of capital discipline and consistent payout history. A focus on high-quality businesses and consistent dividend payers may help to mitigate volatility and market drawdowns, which have historically been sharper in international markets than in the US. This type of defensive value approach to international developed market equities over the coming quarters may prove rewarding, particularly in Europe, where growth risks are tilted to the downside given the possibility of renewed trade tensions under a second Trump term in the US.

Small caps in the spotlight

To complement large cap exposures, we see potential to capitalize on a small cap reversal of fortune in 2025, driven by small caps’ historically large valuation discounts relative to large caps and a supportive rate cutting environment. Historically, US small caps have often outperformed large caps following the end of rate cycles, especially in soft-landing scenarios.⁸ A higher share of floating debt versus large caps means smaller companies may benefit disproportionately from rate reductions in 2025 as interest payments decrease. Small caps generally have a more domestic focus making them less dependent on uncertain international trade, which continues to fragment. Relative to larger businesses, smaller companies have tended to also be more insulated from negative consequences of tariffs, given their greater domestic revenue sources and shorter supply chains. We believe the less liquid, more diverse and less thoroughly researched nature of the small cap market suits active investment strategies given the potential for higher dispersion. From a fundamental perspective, access to company management teams, including while companies are still private, can provide early opportunities to uncover hidden gems before they are broadly recognized by the market once they become public. Quantitative approaches, including the application of AI techniques, may help to capture alpha and manage risks in what is a vast and diverse investment universe.

Emerging opportunities in emerging markets

We believe EM equities will constitute a significant part of a broader equity market opportunity set in 2025. From a macro perspective, non-recessionary Fed rate cuts and easing by other EM central banks should be supportive for the asset class. Strong corporate earnings growth at fair valuations also keeps us constructive, notwithstanding potentially elevated volatility from the fallout of the US election and ongoing Middle East tensions. Risks of additional US tariffs on imports could pose headwinds to EM equities, particularly to China, and other economies with high goods revenue exposure to the US. At the same time, hopes of a stimulus-led growth revival in China bode well for EMs.

More broadly, the environment may lead more investors to reevaluate how to manage Chinese equities within the context of emerging market equity allocations. Emerging markets and China used to move in tandem, but they have started to diverge significantly post pandemic. This growth divergence may widen further in 2025, owing to more favorable demographic dynamics outside of China and a shift in supply chains towards emerging market ex-China countries.

Splitting emerging market and China allocations into dedicated allocations may introduce greater flexibility to manage active views more effectively in each universe and lean more heavily into alpha opportunities. Alongside allocation decisions, finding high-quality, attractively-valued emerging market opportunities across a diverse universe requires an informational advantage to know more, act faster and potentially capture durable long-term investment performance.

China remains a dominant economic force in the global economy with a rich and vibrant equity universe. We emphasize the need to stay bottom-up and focused on quality over the long term. Opportunities can be found tied to technology innovation, a key trend benefitting the healthcare and IT sectors, or in electric vehicle production. Outside of China, countries benefitting from favorable demographics, such as India, look compelling. Elsewhere, markets like Taiwan and South Korea contain semiconductor companies crucial to AI development. Notwithstanding tariff risks in a second Trump presidency, we expect further pressure for relocation of some supply chains (or at least final assembly) from China to Southeast Asia, India, and Mexico.

India to stay stronger-for-longer

India will remain a bright spot in 2025, in our view, given its solid economy, profitable and diverse corporate universe backed by megatrends like digitalization, growth of an affluent middle class and a reform-oriented government. India has shown limited long-term correlation to previous US interest rate easing cycles, underscoring the more domestic and earnings-driven nature of India’s growth story.⁹ We see India as a potential beneficiary of the Trump administration among emerging markets. The country has a more domestically-driven growth profile than many other EMs, and many companies have diversified supply chains. India is also less at risk of a fallout from global trade wars, in our view, and some export product categories may in fact benefit from the new US administration’s tougher stance towards China.

We believe elevated valuations should be looked at in the context of robust corporate earnings delivery, which are sustained by resilient macro environment. Recently we have observed secular themes in India, such as more efficiency from digitization, manufacturing competitiveness as well as a cyclical recovery in sectors such as industrials and financials. Indian bank financials remain particularly strong with improving loan growth on the back of healthy macro and credit demand. We believe domestic banks also have attractive growth potential given the under-penetration of retail and micro, small and medium enterprises (MSME) credit in India.

Many sector-leading companies can be found in India’s small and mid-cap space due to the still-early stage of India’s economic development. Buoyant IPO markets have allowed many small and medium high-quality companies to go public, providing opportunities to bottom-up stock pickers. Overall, when investing in Indian equities, it is important to remember that India’s growth story is a marathon and not a sprint. We stay focused on companies with strong fundamentals that are trading at attractive valuations, which will be key to capitalize on India’s stronger-for-longer growth story.

Japan’s structural story remains intact

Since 2022 Japan’s equity market has been driven by strong earnings, corporate governance momentum and a shift to an inflationary environment.¹⁰ More recently, the market has faced some headwinds. Japanese stocks and the yen were whipsawed amid August volatility. Political change in Japan has added to uncertainty. Our constructive stance on Japan’s economy and equity market remains intact. New prime minister Shigeru Ishiba has indicated that he will continue the Kishida administration's economic policies.¹¹ We believe this suggests further progress in corporate governance reforms. Wages in Japan continue to grow steadily,¹² suggesting that the Bank of Japan's aim of a virtuous cycle of wage growth and inflation is on track, although rising labor costs could be a headwind for some companies. Following the US election result, Japanese stocks posted strong returns, led by financials and global cyclical sectors.¹³ We see Japan continuing to play a key role as a US defense partner and benefiting from friend-shoring trends. We favor active exposure to structural growth winners and select value opportunities. We remain focused on identifying high-quality Japanese businesses with robust fundamentals, backed by shareholder-friendly management teams with improving governance practices.

Three Key Questions

1. Can company earnings stay resilient in 2025?

We maintain our cautious optimism on the earnings outlook for 2025 and expect earnings growth to broaden beyond the Magnificent 7, beyond the US and beyond large-cap stocks. We are watching the ability of companies to protect margins on the back of continued wage pressures and lower capacity to increase prices as inflation returns to normal levels. In the US, S&P 500 margins have been a direct beneficiary of declining corporate tax rates. An extension of the previous Trump administration’s tax cuts beyond 2025 is a possibility, as is reinstatement of some expired business investment incentives. This could potentially boost S&P 500 earnings per share by as much as 4%. Overall, we continue to favor quality businesses with unique competitive advantages in their respective markets.

2. Where might opportunities emerge as AI broadens out?

Our outlook for technology is positive in 2025. We see fundamentals improving across the tech ecosystem, and easing interest rates provides additional support. In our view, some AI investment opportunities have yet to be fully recognized. We see exciting risk reward potential among “enablers” (semiconductors and semi-cap equipment providers) and “hyperscalers” (cloud providers that AI workloads run on). We also see potential opportunities related to data & security (including software companies that finetune huge amounts of data to be stored in the cloud for AI models) and applications (software and enterprises across sectors that will leverage AI broadly).

3. What strategies may help combine the benefits of both active and passive equity approaches?

For investors looking to capture the benefits of active management while preserving main features of passive investing (such as low costs and transparency to monitor risk and returns), we believe that alpha enhanced indexing approaches may provide an answer in equity markets. These approaches can be driven by systematic, data-driven techniques, coupled with enhanced risk management and the ability to integrate investor preferences to arrive at a customized portfolio. In particular, active ETFs continue to grow in popularity, providing potential cost benefits and transparent ways for investors to blend passive index exposure and active security selection.¹⁴ We believe having the right engines to power these vehicles is critical to deliver positive investment outcomes.

For more of our 2025 investment views explore A New Equilibrium, Landing on Bonds, Exploring Alternative Paths and Disruption from All Angles and the potential sources of attractive returns they could create.

¹Goldman Sachs Global Investment Research. As of October 25, 2024.
²Goldman Sachs Global Investment Research. As of October 18, 2024.
³Goldman Sachs Global Investment Research. As of September 5, 2024.
⁴Goldman Sachs Global Investment Research. As of September 5, 2024.
⁵MSCI EAFE Index. As of September 2024.
⁶Goldman Sachs Global Investment Research. EURO STOXX 50. As of June 20, 2024.
⁷MSCI. As of September 30, 2024.
⁸FactSet, Goldman Sachs Asset Management. As of September 30, 2024. End of rate cutting cycles, starting January 1996, November 1998, June 2003, December 2008, March 2020.
⁹FactSet, MSCI, Goldman Sachs GIR, Goldman Sachs Asset Management. As of August 2024.
¹⁰Goldman Sachs Asset Management. As of October 31, 2023.
¹¹Goldman Sachs Global Investment Research. As of October 4, 2024.
¹²Ministry of Health, Labor and Welfare (Japan), Goldman Sachs GIR. As of October 9, 2024.
¹³Goldman Sachs Global Investment Research. As of November 10, 2024.
¹⁴Reuters. As of September 27, 2024.

Asset Management Outlook 2025: Broader Equity Horizons

Broader Equity Horizons is part of our 2025 Outlook: Reasons to Recalibrate. Read our views in full.

GlossaryAlpha: The measurement of the difference between a portfolio’s actual returns and its expected returns given its risk level as measured by its beta. A higher alpha is better, but a high alpha is only reliable in the presence of a high R-squared value. It can be viewed as a risk-adjusted measure of return. Some advisors see alpha as a measurement of the value added or subtracted by a fund’s manager. A positive alpha figure indicates the portfolio has performed better than its beta would predict. A negative alpha figure indicates a portfolio has underperformed, given the expectations established by the fund’s beta.Credit Rating: A credit rating is an assessment of the credit risks associated with a financial instrument or a financial entity. "AA" and "BBB" are considered investment grade. Ratings are subject to change and do not eliminate the risks of investing.Dovish: Relatively more accommodative monetary policy.Evergreen Funds: A type of semi-liquid investment vehicle providing exposure to private companies.Hawkish: A more aggressive monetary policy, the opposite of DovishMSCI EAFE Index: A stock market index that measures the performance of large- and mid-cap companies across 21 developed markets countries around the world.S&P 500 Index: The Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices.See Glossary for definition of terms used in reference to Products

Risk considerations and disclosures

Equity investments are subject to market risk, which means that the value of the securities in which it invests may go up or down in response to the prospects of individual companies, particular sectors and/or general economic conditions. Different investment styles (e.g., “growth” and “value”) tend to shift in and out of favor, and, at times, the strategy may underperform other strategies that invest in similar asset classes. The market capitalization of a company may also involve greater risks (e.g. "small" or "mid" cap companies) than those associated with larger, more established companies and may be subject to more abrupt or erratic price movements, in addition to lower liquidity.

Investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity, interest rate, prepayment and extension risk. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. The value of securities with variable and floating interest rates are generally less sensitive to interest rate changes than securities with fixed interest rates. Variable and floating rate securities may decline in value if interest rates do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Credit risk is the risk that an issuer will default on payments of interest and principal. Credit risk is higher when investing in high yield bonds, also known as junk bonds. Prepayment risk is the risk that the issuer of a security may pay off principal more quickly than originally anticipated. Extension risk is the risk that the issuer of a security may pay off principal more slowly than originally anticipated. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Emerging markets investments may be less liquid and are subject to greater risk than developed market investments as a result of, but not limited to, the following: inadequate regulations, volatile securities markets, adverse exchange rates, and social, political, military, regulatory, economic or environmental developments, or natural disasters.

Environmental, Social and Governance (“ESG”) strategies may take risks or eliminate exposures found in other strategies or broad market benchmarks that may cause performance to diverge from the performance of these other strategies or market benchmarks. ESG strategies will be subject to the risks associated with their underlying investments’ asset classes. Further, the demand within certain markets or sectors that an ESG strategy targets may not develop as forecasted or may develop more slowly than anticipated. Any ESG characteristics, views, assessments, claims or similar referenced herein (i) will be based on, and limited to, the consideration of specific ESG attributes or metrics related to a product, issuer or service and not their broader or full ESG profile, and unless stated otherwise, (ii) may be limited to a point of time assessment and may not consider the broader lifecycle of the product, issuer or service, and (iii) may not consider any potential negative ESG impacts arising from or related to the product, issuer or service.

An investment in private credit and private equities is not suitable for all investors. Investors should carefully review and consider the potential investments, risks, charges, and expenses of private equity before investing. They are speculative, highly illiquid, involve a high degree of risk, have high fees and expenses that could reduce returns, and subject to the possibility of partial or total loss of capital. They are, therefore, intended for experienced and sophisticated long-term investors who can accept such risks.

Private equity and private credit investments are speculative, highly illiquid, involve a high degree of risk, have high fees and expenses that could reduce returns, and subject to the possibility of partial or total loss of fund capital; they are, therefore, intended for experienced and sophisticated long-term investors who can accept such risks.

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Real estate investments are speculative and illiquid, involve a high degree of risk and have high fees and expenses that could reduce returns. These risks include, but are not limited to, fluctuations in the real estate markets, the financial conditions of tenants, changes in building, environmental, zoning and other laws, changes in real property tax rates or the assessed values of Partnership Investments, changes in interest rates and the availability or terms of debt financing, changes in operating costs, risks due to dependence on cash flow, environmental liabilities, uninsured casualties, unavailability of or increased cost of certain types of insurance coverage, fluctuations in energy prices, and other factors not within the control of the General Partner, such as an outbreak or escalation of major hostilities, declarations of war, terrorist actions or other substantial national or international calamities or emergencies. The possibility of partial or total loss of an investment vehicle’s capital exists, and prospective investors should not invest unless they can readily bear the consequences of such loss.

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Diversification does not protect an investor from market risk and does not ensure a profit.

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Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. The exclusion of “failed” or closed hedge funds may mean that each index overstates the performance of hedge funds generally.

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Date of first use: November 20, 2024