Interview, Other
Piloting Through: Why Investors Should Stay the Course
- Goldman Sachs Investment Strategy Group, led by Chief Investment Officer Sharmeen Masavaramani, maintains a "stay invested" recommendation for U.S. equities in 2022 despite valuations being in the 10th decile (expensive).
- Historical data indicates equities remain in the 10th valuation decile as frequently as December 2016, with the S&P 500 rising approximately 130% since then; similarly, the mid-1990s saw returns of nearly 200% after entering this valuation range in July 1995.
- The implied equity risk premium, comparing S&P 500 earnings yields to 10-year Treasury yields, is currently above average, suggesting equities are cheap relative to fixed income.
- Goldman Sachs forecasts U.S. economic growth of 3.5% to 4.0% (midpoint 3.7%) and global growth of 4.5% for 2022, providing a favorable backdrop for earnings expansion.
- S&P 500 earnings are projected to grow by 12% in 2022, though earnings multiples (valuations) are expected to contract slightly.
- The firm's base case scenario for U.S. equities assumes a total return of 6% for the year (including dividends) with a 65% probability; a "good case" scenario projects 12% total returns with a 20% probability.
- Given a market 16% higher from current levels, the firm sees upside of 20%+ in the good case scenario from today's prices.
- The Federal Reserve is expected to implement three to four interest rate hikes in 2022, with the 10-year Treasury yield reaching approximately 2%.
- Inflation is expected to moderate by mid-2022 regarding goods, while shelter and wage inflation are projected to remain persistent longer.
- Unemployment is forecast to decline to approximately 3.1% by year-end, supported by expectations of returning labor force participation.
- While 88% of economic expansions have historically resulted in positive equity returns, the firm acknowledges a 100% probability of a 5% market downdraft and a 79% (rounded to 80%) probability of a 10% downdraft due to volatility.
- Recent market volatility is cited as a buying opportunity, with recommendations to slowly add to equity positions using conservative option strategies.
- Market concentration in the top five S&P 500 stocks is acknowledged as higher than historical norms, but data shows this concentration has no significant bearing on subsequent forward returns.
- Over the last bull market, the performance gap between market-cap-weighted indices (e.g., S&P 500) and equal-weighted benchmarks is minimal, disproving the narrative that rallies are driven solely by a handful of stocks; the median stock rose 27% last year.
- Geopolitical shocks, new COVID mutations, and the pace of Fed tightening are identified as primary "iceberg" risks, yet the firm assigns a low probability of a recession occurring in 2022.
- Historical data shows that following the first Fed rate hike, recessions typically begin 30 months later and the S&P 500 peaks 24 months later, with the average return from the first hike being 36%.
- Goldman Sachs maintains a strategic overweight to U.S. equities relative to non-U.S. developed and emerging markets, citing superior historical earnings growth; U.S. companies have out-earned international peers in nearly every sector since 2007.
- U.S. equities have returned nearly 800% since the 2008 financial crisis trough, compared to under 300% for non-U.S. developed markets and emerging markets, and 230% for China.
- The firm recommends a very small strategic allocation to emerging markets (approximately 2% of a moderate-risk portfolio), with China representing roughly one-third of that allocation.
- China's equity market is projected to underperform due to the zero-COVID policy, regulatory tightening, and supply chain constraints; Chinese equities fell 21% in 2021 while U.S. equities rose 29%.
- The annual report theme "Piloting Through" and its cover art depicting a U.S. Coast Guard icebreaker symbolize the preference for U.S. equities navigating global macroeconomic risks.