Market Pulse September
Macro Views
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.
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.
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.
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
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.
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.
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 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.
Source: Bloomberg and Goldman Sachs Asset Management. As of August 5, 2024
Source: Bloomberg and Goldman Sachs Asset Management. As of June 30, 2024
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.