Interview, Other
America Powers On: Why US equities are still poised to outperform in 2024
- 2023 Performance Context: U.S. equities rallied to near-record highs in 2023, with the S&P 500 gaining 26%, defying bearish consensus predictions of a recession that had a 68% probability in early 2023.
- 2024 Base Case Return: Goldman Sachs Investment Strategy Group (ISG) forecasts mid-single-digit returns for U.S. equities in 2024, projecting approximately 6% for the S&P 500.
- Valuation Outlook: The firm anticipates potential multiple contraction rather than expansion, citing S&P 500 valuations in the 10th decile (cheaper than 90% of historical periods), which limits upside potential despite strong fundamentals.
- Key Return Drivers: Unlike 2023, where multiple expansion and recession fears eased contributed significantly to gains, 2024 returns will be driven primarily by earnings growth rather than valuation expansion.
- International Allocation: While non-U.S. developed markets (e.g., Japan, UK) show lower absolute valuations, ISG advises against major tactical shifts away from U.S. equities because sector weight differences (e.g., low tech exposure in the UK) skew valuation metrics.
- Emerging Markets Stance: ISG recommends against tactical overweight positions in China despite its cheap valuation, citing a structural downward shift in GDP growth expectations (from 7.7% pre-pandemic to 3.4% forward) and regulatory uncertainties.
- Strategic Theme Longevity: The "U.S. Preeminence" theme has persisted for 14 years, anchored by the U.S.'s wealth per capita, abundant natural resources, highest labor productivity, and leading corporate management quality.
- Tax Efficiency Advice: Investors are advised to remain invested in U.S. equities rather than shifting to bonds or cash to avoid triggering significant capital gains taxes that would require a 20% market decline just to break even.
- Sector and Tactical Tilts:
- Energy: The firm maintains a tactical tilt toward energy subsectors, specifically Master Limited Partnerships (MLPs) in infrastructure, which offer high distribution yields and tax advantages.
- Uranium: ISG recommends a long position in physical uranium due to anticipated supply shortages driven by increased nuclear demand in China and Japan for energy transition purposes.
- Asset Class Expectations: Projected returns include ~7% for the MSCI All Country World Index, 4–5% for bonds, and ~5% for cash, suggesting insufficient dispersion to justify major asset class reallocation.
- Primary Risk Factor: The escalation of the Israel-Hamas war is identified as the top risk to the 2024 outlook, with potential impacts on GDP growth, risk premiums, and oil prices if regional involvement expands.
- Secondary Risk Assessment: The Ukraine-Russia war is viewed as a current stalemate with lower immediate downside risk to the U.S. economic outlook compared to geopolitical escalation in the Middle East.
- Cover Art Symbolism: The 2024 report cover, featuring a classic Cadillac on an open road, symbolizes U.S. leadership, vast geographic and economic diversity, and a lack of global competitors in the rearview or ahead in the mirror.