Keep on truckin’: Will the US continue to outperform other markets?

2025 Investment Outlook & U.S. Preeminence

• Goldman Sachs Wealth Management's 17th annual outlook, titled "Keep on Truckin'," asserts that U.S. economic preeminence remains intact with a widening gap between the U.S. and other economies.
• U.S. GDP growth is projected to remain well above trend at approximately 2.3%, supporting earnings growth despite current valuation concerns.
• While acknowledging U.S. equities are expensive (currently in the 9th or 10th decile of valuation metrics), the firm rejects the myth that valuations must revert to the post-WWII mean to justify continued outperformance.
• 2025 Return Forecasts:
  • Base case return for U.S. equities is 8% (up from 6% last year, largely adjusted for recent market volatility).
  • Returns for major non-U.S. developed market indices are forecast between 7% and 9%.
  • Long-term expectations (next 5 years) anticipate somewhat lower valuations but maintain that current levels are manageable with strong earnings.

Asset Allocation Strategy Shifts

• Goldman Sachs has made a strategic shift to lower allocations to non-U.S. developed and emerging market equities.
• The capital reallocated from non-U.S. public equities is being moved into private assets, specifically U.S.-oriented buyout and growth equity funds.
• This shift reflects a conviction that private U.S. assets will outperform non-U.S. public equities over the next decade.
• The firm notes that their strategic overweight in U.S. equities has narrowed from a 23% premium over the global benchmark in 2009 to a 7% premium currently due to prior outperformance.

Interest Rates, Inflation, and Fixed Income

• Base case assumes interest rates will decline despite market fears regarding tariffs, potential trade wars, or U.S. debt trajectory.
• Any tariffs introduced are expected to be incremental rather than immediate or full-scale, limiting inflationary impact.
• Corporate interest burdens in the U.S. are currently negligible due to the prevalence of fixed-rate debt issued during previous low-rate environments.
• U.S. debt trajectory concerns are viewed as a long-term issue rather than an immediate risk to the 2025 market environment.
• High-quality, long-term fixed income is recommended as the primary hedge against volatility, rather than purchasing expensive derivatives like put options.

International Equity & China Analysis

• Non-U.S. developed markets (e.g., the UK) appear cheap only due to sector composition; they have low exposure to high-valuation tech and high exposure to low-valuation energy sectors.
• Sector-adjusted valuations suggest non-U.S. markets are not as undervalued as superficial metrics imply.
• China Positioning:
  • China is not recommended as a buy for long-term investing due to structural headwinds and demographics.
  • The firm predicts China may follow Japan's "lost decades" trajectory, offering only temporary trading rallies similar to the post-1989 Japanese market, which took 35 years to recover to peak levels.
  • Chinese equity markets are viewed as a trading environment rather than an investing environment, driven by stimulus rather than sustainable growth.

Commodities, Gold, and Crypto

• Gold:
  • Not recommended as a strategic asset class or a reliable inflation hedge; U.S. equities historically perform better as inflation hedges.
  • Recent price appreciation is driven by central bank purchases (specifically Chinese) for geopolitical diversification, which is deemed unpredictable and non-strategic.
• Bitcoin & Crypto:
  • Maintains stance that crypto is a speculative trading asset, not an investment asset class, as it generates no cash flows, earnings, or portfolio diversification benefits.
  • Dismisses the argument that "price action creates its own investment thesis" as illegitimate; no intrinsic valuation model exists.
  • Does not recommend client allocation despite potential regulatory tailwinds from a new administration.

Portfolio Construction & Risk Management

• Recommends avoiding tactical hedging via derivatives due to high costs and the risk of missing upside during the interim.
• Advises clients to withstand volatility through proper strategic asset allocation that includes sufficient high-quality fixed income.
• Warns against realizing capital gains in U.S. equities for tax purposes if the goal is simply to avoid volatility.