Market Pulse: A Precise View

Capturing elevated dispersion and drawdowns when they occur at the single stock, rather than sector, level tend to provide more pronounced opportunities to harvest losses and thus maximize after-tax equity returns.

Macro Views

Recession Risk

Recent bouts of weakness in the 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.

Labor

Recent weakness in jobs data, headlined by both soft payroll growth and another uptick in the unemployment rate, raised concern about the strength of the US labor market. We believe the market reaction to this weakness was overblown due to the fact that the increase in unemployment has been driven mainly by higher supply of workers and frictional unemployment due to elevated immigration in recent years.

Monetary Policy

Minutes from the July FOMC meeting and recent commentary from Fed Chairman Jerome Powell have further solidified the likelihood of a September rate cut. We remain confident that the Fed will reduce the policy rate by just 25bps at its September meeting. However, a second consecutive negative surprise in job growth in the first week of September could instead prompt a 50bp cut.

US Elections

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.

Chart of the Month

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

US Earnings

With 2Q S&P 500 earnings season effectively complete, we conclude that 1) revenues are stabilizing at a healthy level, up 2.4% year-over-year excluding energy, 2) consumer fears are greatly exaggerated with real income growth positive across all income cohorts, 3) the labor market has rebalanced, but not swung too far in the other direction with company mentions of layoffs still at pre-pandemic levels, and 4) elections may be weighing modestly on capex as many companies cite delays in spending until post-election clarity.

US Equities

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 or below our fair value estimates. GIR sees 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.

Volatility

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.

Asset Class Forecasts

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 August 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: A Precise View

Tax-advantaged equity SMAs have become a popular strategy for investors seeking to generate outperformance in efficient markets such as US large cap. With that said, between the two popular methods of loss harvesting – single stock vs sector level – single stock loss harvesting has provided investors with greater opportunity to minimize their capital gains taxes while tracking the broad equity market. Investors seeking alpha via the bottom, rather than top, line may benefit from taking a more precise view.

Realizing DispersionIn down markets, losses are a dime a dozen. But, in up markets, dispersion becomes key in generating tax alpha, which is more pronounced among stocks than sectors. We believe stock-loss harvesting is important because equity markets have trended higher more often than they’ve trended lower. In fact, the S&P 500 has delivered positive returns in 80% of rolling 1-year periods since 1969. This suggests that to better find tax-loss harvesting opportunities, investors should look within sectors, not at them.

Source: Bloomberg and Goldman Sachs Asset Management. As of August 5, 2024

Capturing DrawdownsCapturing losses of market capitalization, whether it be at the sector or stock level, is key to efficiently managing taxes. The question of which approach produces the greatest opportunity to sell losing positions is therefore paramount. A look back reveals that losses of market capitalization have been larger at the stock level in each calendar year of the last decade, demonstrating that investors have been most successful capturing losses when using a granular approach.

Source: Bloomberg and Goldman Sachs Asset Management. As of June 30, 2024

Exploiting Granularity To drive maximum tax-alpha, a strategy must effectively exploit the number of index constituents at a loss, the size of those constituents, and the severity of their drawdowns. Taking each of these factors into account this year further supports the argument for single-stock loss harvesting. Thus far in 2024, the aggregate market capitalization of single stocks that have drawn down has been nearly three times greater than that of sector drawdowns, further signifying the power of precision.

Source: Bloomberg and Goldman Sachs Asset Management. As of June 30, 2024

“We/Our” refers to Goldman Sachs Asset Management. “Realizing Dispersion” Section Notes: Source: Bloomberg and Goldman Sachs Asset Management. As of August 5, 2024. Chart shows the sum of the market capitalizations of index constituents at the beginning of a calendar year multiplied by the respective maximum drawdowns in the prices of those index constituents throughout the calendar year. Analysis considers stocks and sectors within the S&P 500 at the beginning of each calendar year. “Capturing Drawdowns” Section Notes: Source: Bloomberg and Goldman Sachs Asset Management. As of June 30, 2024. Charts shows the range of returns of the best and worst performing stocks and sectors within the S&P 500 relative the return of the index itself. “Exploiting Granularity” Section notes: Source: Bloomberg and Goldman Sachs Asset Management. As of June 30, 2024, Chart shows the market capitalizations of index constituents at the beginning of 2024 multiplied by the respective maximum drawdowns in the prices of those index constituents throughout the calendar year. Analysis considers stocks and sectors within the S&P 500 at the beginning of each calendar year. Chart also shows the percentage of stocks within each sector that have traded at a loss at some point throughout 2024. 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 document. Past performance does not guarantee future results, which may vary.

Market Pulse September

The Market Pulse highlights the latest market developments and trends, coupled with insights on portfolio construction.

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GlossaryGIR refers to Goldman Sachs Global Investment Research
GDP refers to gross domestic product
Fed refers to the Federal Reserve
Bps refers to basis points
Capex refers to capital expenditures
FOMC refers to the Federal Open Market Committee
AI refers to artificial intelligence
Levered ETF refers to a leveraged exchange traded fund that uses financial derivatives and debt to amplify the returns of an underlying index
August 5th daily volume and liquidity according to Goldman Sachs Global Markets

Index Benchmarks
The S&P 500 Index is the Standard & Poor's 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices. The index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index.See Glossary for definition of terms used in reference to Products

Risk considerations and disclosures

Equity securities are more volatile than bonds and subject to greater risks. Foreign and emerging markets investments may be more volatile and less liquid than investments in US securities and are subject to
the risks of currency fluctuations and adverse economic or political developments. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. The currency market affords investors a substantial degree of leverage. This leverage presents the potential for substantial profits but also entails a high degree of risk including the risk that losses may be similarly substantial. Currency fluctuations will also affect the value of an investment.

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.

International securities may be more volatile and less liquid and are subject to the risks of adverse economic or political developments. International securities are subject to greater risk of loss 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.

When interest rates increase, fixed income securities will generally decline in value. Fluctuations in interest rates may also affect the yield and liquidity of fixed income securities.

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.

Commodities greater volatility than investments in traditional securities. Investments in commodities may be affected by changes in overall market movements, changes in interest rates, or factors affecting a particular industry or commodity. Commodities are also subject to social, political, military, regulatory, economic, environmental or natural disaster risks.

The risk of foreign currency exchange rate fluctuations may cause the value of securities denominated in such foreign currency to decline in value. Currency exchange rates may fluctuate significantly over short periods of time. These risks may be more pronounced for investments
in securities of issuers located in, or otherwise economically tied to, emerging countries. If applicable, investment techniques used to attempt to reduce the risk of currency movements (hedging), may not be effective. Hedging also involves additional risks associated with derivatives.

General Disclosures

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

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

Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. It should not be assumed that investment decisions made in the future will be profitable or will equal the performance of the securities discussed in this document.

Neither MSCI nor any other party involved in or related to compiling, computing, or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability, or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security, including any Goldman Sachs product or service. Views and opinions are current as of the date of this document and may be subject to change, they should not be construed as investment advice.

Goldman Sachs does not provide legal, tax or accounting advice, unless explicitly agreed between you and Goldman Sachs (generally through certain services offered only to clients of Private Wealth Management). Any statement contained in this presentation concerning U.S. tax matters is not intended or written to be used and cannot be used for the purpose of avoiding penalties imposed on the relevant taxpayer. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction.

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Although certain information has been obtained from sources believed
to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this document and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

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PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR
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Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

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Date of first use: September 04, 2024