Market Pulse February
The US economy is in the sweet spot of healthy growth and gradual disinflation, and consensus has been moving towards this more positive view, supported by solid consumer spending and increased private investment. Looking ahead, our key question remains the size and speed of the Trump policy agenda.
2025 may be a year of major policy movement directly influencing macroeconomic and market conditions. Initiatives are likely to include revisions to the US tax code, trade, immigration, regulation, deficit funding, and geopolitical maneuvering. Amid a slew of executive orders following President Trump’s inauguration, we expect higher China and auto tariffs, lower immigration, some fresh tax cuts, and regulatory easing.
Despite varied progress in reducing inflation globally, 9 of 10 major central banks (G10) are expected to ease rates in 2025, albeit with highly variable trajectories. GIR expects the Fed to deliver two 25bp cuts this year, in June and December, and the ECB to deliver sequential 25bp cuts until the policy rate reaches 1.75% in July 2025, although faster and deeper cuts are possible if growth turns out weaker than we project.
Source: Goldman Sachs Investment Strategy Group and Goldman Sachs Asset Management. As of February 3, 2025. Chart shows S&P 500 performance following the first cut in prior Fed cutting cycles, in addition to the total amount of cuts/hikes issued by the Fed in each specific period. Past performance does not predict future returns and does not guarantee future results, which may vary.
Today’s elevated valuations may raise draw-down risk but are supported by strong macro and earnings fundamentals. In fact, over the last several decades, reduced macro volatility, moderating inflation, and strengthening corporate execution has allowed the markets to stay expensive longer and reset to a higher normalized valuation. However, increased competition facing the highly concentrated US mega-cap names remains a key concern.
Bond investors are likely to pay close attention to fiscal policy and debt sustainability, which we believe will lead to higher term premia and steeper yield curves. While yield curves in key DM markets have now dis-inverted, they remain flatter than in the past. As yield curves steepen, flexible bond strategies and active management will become even more critical, in our view.
In DM, we believe US carry is secure and prefer non-US duration. We see more opportunities in EM despite Trump risk; in particular, we like Latin America and especially Brazil given high carry and value combined with low sensitivity to China risk.
Price targets of major asset classes are provided by Goldman Sachs Global Investment Research. Source: “Markets are moving from tech to tariffs.” As of February 3, 2025.
Source: MSCI, GS GIR, GS ISG and GS Asset Management. As of February 3, 2025. “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 the end 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 predict future returns and does not guarantee future results, which may vary.
The Last Mile
Inflation normalization is proving slow as both the magnitude and velocity of improvement diminish. Structural factors and tariff uncertainty may make the data in 2025 noisy. While the post-COVID inflation spike has largely subsided, concerns over positive data surprises, tariffs, immigration curbs, and debt sustainability may fuel concerns of renewed medium-term US inflation and keep rates higher for longer. We see potential opportunity to hedge these risks through US equities, real estate, and private infrastructure.
US Equities Have A Strong History of Outperforming Inflation
Despite the allure of commodities as an inflation hedge, the S&P 500 has been a more effective and reliable inflation hedge. US equities have demonstrated a higher frequency of outperforming inflation across all investment horizons. Commodities tend to hedge inflation as central banks tighten and real rates rise. This has already occurred. We believe the more effective strategy going forward would be to hold positions that can pass through costs and benefit from stable economic growth.
Source: GS Investment Strategy Group and GS Asset Management. As of 3Q 2024.
More Data, More Power
We maintain our view that significant investment in private infrastructure and real estate should come as a byproduct of the surge in data center demand, driven by the rise in cloud computing and AI. It is also evident that power consumption outside of AI growth is similarly at an important inflection point. We view real estate debt as a way to capitalize on these trends while potentially hedging against sticky inflation and higher rates, mainly due to the asset class’s floating rate structure and shorter duration leases.
Source: IEA, EuroStat, British Department for Business - Energy & Industrial Strategy, and GS Asset Management. As of December 31, 2022.
Infrastructure Shines When Inflation Overshoots
Furthermore, in a world of elevated inflation and greater macro uncertainty, we see infrastructure as another attractive diversifier as infrastructure businesses tend to be more resilient through economic cycles and higher inflationary periods, as seen through the asset class’s outperformance during periods of high inflation since 2000. This, coupled with trends such as increased defense spending, AI innovation, and the push for decarbonization, should act as a major tailwind for the asset class, in our view.
Source: EDHEC Infra300, NFI-ODCE, S&P500, Bloomberg Barclays, BLS and GS Asset Management. As of September 30, 2024.
