Nov 17, 2023, 5:12 PM ETInterview, Podcast

Why the global economy and markets can continue to outperform in 2024

2023 Growth Outperformance: The global economy exceeded Goldman Sachs' own optimistic 2023 forecasts, driven primarily by U.S. resilience.
Recession Avoidance Drivers: The U.S. avoided predicted recessions due to post-pandemic normalization in goods, labor, and demand imbalances, contrasting with historical "overheating" cycles that typically required Fed-induced recessions to rebalance.
Market Mispricing (Growth): Investors significantly underestimated U.S. growth resilience in the face of aggressive interest rate hikes, leading to surprise in equity markets.
Market Mispricing (Equities): Despite higher yields, U.S. mega-cap equities outperformed due to AI-driven earnings power and strong economic fundamentals, defying expectations of yield-driven constraints.
Asset Class Performance: Cash rates acted as a high hurdle, causing government bonds and corporate credit to underperform; only U.S. equities (specifically large-cap) beat cash, while equal-weighted S&P 500 and international indices lagged.
Investment Strategy Correction: The consensus correctly identified cash as a high-yield anchor, though the narrowness of equity gains and bond underperformance were underappreciated risks.

Global Growth Forecast: Goldman Sachs projects 2.6–2.7% global growth in 2024, matching 2023 levels ("more of the same").
Regional Growth Nuances:
- U.S.: Expected to grow slightly above 2%, with deceleration compared to 2023.
- Euro Area: Expected to accelerate to nearly 1% from a stagnant start, driven by recovering real disposable income.
- China: Forecasted to decelerate from 5.3% in 2024 to 4.8% in 2025, with a longer-term trend potentially falling to 3% due to demographics and housing corrections.
Disinflation Trajectory: Core inflation across G10 and major emerging markets is expected to decline from 6% (2022) to 3% (current) and further to the 2–2.5% target range by late 2024.
Inflation Drivers: Continued disinflation will stem from labor market balancing (wage adjustment lagging employment balance), goods sector normalization, and rental housing market adjustments.
Monetary Policy Peak: The most aggressive Fed rate hikes occurred in mid-2022; with a two-quarter lag on growth impact, the maximum negative effect on the economy is considered passed.

Policy Rate Levels: Goldman Sachs has raised long-term policy rate estimates by 50 basis points, viewing current levels as structurally higher.
Terminal Rate Projections:
- Fed: 3.5% to 3.75%.
- Euro Area: 2.5%.
- Drivers: Larger deficits, strong investment needs (decarbonization, supply chain resilience), and AI-driven productivity growth.
Timing of Rate Cuts:
- Fed: Cuts expected in the second half of 2024; ECB and Bank of Canada may cut slightly earlier.
- Rationale: Central banks will normalize policy gradually once inflation is close to mandates, not waiting to hit the official 2% target.
Financial Conditions vs. Rates: The firm emphasizes monitoring "financial conditions" (rates, equity prices, credit spreads, currency) as the primary driver of cyclical growth, suggesting the level of policy rates is less critical once the tightening cycle is over.
Yield Curve Normalization: Long-term yields have reset to pre-Great Financial Crisis (GFC) real yield levels, moving away from the inverted curve that priced in deep recession fears.

Recession Probability: The probability of a U.S. recession in the next 12 months is estimated at 15%, primarily driven by exogenous risks rather than internal monetary tightening.
Primary Geopolitical Risk: Escalation of the Middle East conflict (potentially involving Iran) remains the top risk, primarily through transmission to global oil prices and supply shocks.
Fiscal Concerns: Large U.S. structural deficits and potential election-related fiscal expansion are viewed as long-term growth drags but unlikely to cause immediate 2024 recessions.
European Fragility: Risks include sovereign debt pressures and potential new financial cracks, exacerbated by lingering effects from the Russian gas outage and adjustable-rate mortgages.
U.S. Election Impact: Market volatility regarding the 2024 U.S. election is expected to materialize late (2–3 months prior to the vote), focusing on fiscal policy shifts.

Cash vs. Risk Assets: Unlike 2023, Goldman Sachs forecasts risky assets to outperform cash in 2024, barring a significant growth surprise.
Top Performing Assets:
- Commodities: Forecasted for the strongest returns due to price pressures, carry, and collateral value (hedge against supply disruptions).
- Equities & Credit: Expectation of modest positive returns; equities offer exposure to AI themes and U.S. earnings power.
- Bonds: Expected to marginally outperform cash for the first time in three years, offering recession protection.
Dollar Outlook: The U.S. dollar is expected to weaken modestly (~2%) trade-weighted but likely remain strong due to the U.S. growth premium and wider interest rate spreads versus other developed markets.
Investment Strategy: A shift toward balanced portfolio diversification is recommended to hedge specific risks: commodities for supply shocks, equities for growth/AI, and bonds for recession protection.
Forward-Looking Narrative: The firm's 2024 outlook, titled "The Hard Part Is Over," asserts that the macro backdrop (growth stability + disinflation) will ultimately outweigh current valuation constraints.