2021 Investment Outlook: “US Resilient”

Episode Summary

Executive Summary: Goldman Sachs Wealth Management CIO Charmaine Mozavar-Romani argues that 2021 should be approached through the lens of “U.S. Resilient”: U.S. equities remain structurally superior, investors should stay invested, and high-quality fixed income still matters as a hedge. She sees moderate upside in U.S. stocks, limited appeal in non-U.S. equities and emerging markets, selective credit opportunities in bank loans, and key risks from COVID-19 variants, policy uncertainty, and geopolitical tensions.

Main Topics: U.S. preeminence and staying invested (Priority: 5/5): The outlook argues that U.S. exceptionalism remains intact, so clients should keep the majority of assets in U.S. equities and private equity rather than rotate away after the post-pandemic rally. Why the market rally does not invalidate the thesis (Priority: 5/5): Mozavar-Romani says the 2020 recovery reflects markets looking through immediate shocks, not the end of upside, and that tactical rebalancing is appropriate without becoming underweight equities. Valuation and return expectations for 2021 (Priority: 4/5): She frames expected U.S. equity returns as solid but not euphoric, with valuation concerns tempered by the low-inflation environment. Relative opportunity outside the U.S. (Priority: 4/5): Despite cheaper valuations in Europe, the UK, Japan, and emerging markets, she argues these discounts are justified by weaker earnings growth versus U.S. companies. Fixed income as a portfolio hedge (Priority: 5/5): Even with low or negative expected returns in bonds and cash, high-quality U.S. fixed income is presented as the only dependable hedge against shocks, deflation, and volatility. Selective credit exposure: bank loans (Priority: 3/5): Within credit, she prefers bank loans over generic high yield because they offer better yield enhancement with less duration risk and higher position in the capital structure. Risks to the outlook (Priority: 4/5): The major risks are vaccine rollout and variants, U.S.-China relations, cybersecurity, and domestic political/populist tensions, offset by possible upside from stimulus and pent-up demand.

Key Arguments: U.S. institutions, corporate management, and markets have shown resilience through the pandemic, supporting continued U.S. asset leadership. Investors should stay invested in equities because timing the market around shocks is unreliable and may lead to missing recoveries. Tactical repositioning is useful, but the recommendation is not to go underweight equities after market gains. Non-U.S. equity discounts are explained by weaker earnings growth, so cheaper valuations abroad are not enough to justify major rotation. Emerging markets are not broadly compelling because China is the key growth engine and many other EM economies remain uneven or weak. High-quality U.S. fixed income remains essential despite low returns because it is the most reliable hedge against shocks and deflation. Bank loans are preferred credit exposure because they have less interest-rate sensitivity and comparatively better credit positioning. The biggest uncertainty is COVID-19 variants and vaccine efficacy/rollout, but fiscal stimulus and excess savings could also surprise to the upside.

Data Points: S&P 500 total return since March 2009 trough through end-2020: 609% - Used to support the stay-invested, U.S.-preeminence message S&P 500 annualized return since March 2009: About 18% annualized - Long-run evidence cited for U.S. equities U.S. equity base-case return for 2021: 8% total return - Composed of 6% price return and 2% dividends Price return component of U.S. equity base case: 6% - Part of the 2021 U.S. equity outlook Dividend yield component of U.S. equity base case: 2% - Part of the 2021 U.S. equity outlook Probability assigned to base case: 60% - Likelihood attached to the 8% U.S. equity return scenario Upside scenario for U.S. equities: 17-18% total return - Higher-return scenario with 25% probability Probability assigned to upside scenario: 25% - Chance of stronger-than-base-case equity gains Downside scenario for U.S. equities: Down 17-18% - Lower-return scenario with 15% probability Probability assigned to downside scenario: 15% - Chance of market decline in 2021 U.S. GDP in 2020: Down 3.5% - Referenced as an input to why the 2020 equity rally was surprising U.S. COVID infections: About 20 million - Approximate number cited for 2020 when discussing the disconnect between the economy and markets U.S. fatalities: 345,000 - Approximate COVID-19 death toll cited for 2020 U.S. unemployment increase: Another 10-11 million unemployed by year-end - Used to illustrate how strong the equity rally was despite economic distress 2020 U.S. earnings expectation: Down 20-25% at the time; now seen as mid-teens - Shows that earnings fell less than initially feared China 2020 GDP: Positive - China was described as the only country expected to post positive GDP growth in 2020 China 2021 GDP vs. end-2019: About 10% higher - Indicates China’s strong rebound relative to other economies U.S. savings rate before pandemic: About 8% - Baseline for discussing potential upside from pent-up demand U.S. savings rate during pandemic: Low teens - Evidence of excess savings that could support future consumption Cash expected return: Basically zero - Short-duration return estimate in fixed income discussion 10-year Treasury expected return: Moderately negative, around -1% to -2% - Illustrates why investors question holding bonds despite hedging value U.S. inflation regime since April 1996: Low and stable inflation - Used to justify higher equity valuations versus long-run averages Market context for valuation comparison: Since April 1996 - The period used instead of post-WWII averages for valuation assessment

Pivotal Quotes: "U.S. preeminence is intact and clients should have the preponderance of their assets in U.S. Equities and U.S. private equity." — Charmine Mozavar-Romani: Core thesis of the 2021 outlook "We tell the clients to stay the course." — Charmine Mozavar-Romani: Advice on whether investors should reduce equity exposure after the rally "High-quality US fixed income instruments are the only reliable hedge." — Charmine Mozavar-Romani: Why fixed income still matters despite low expected returns

Implications: The message for investors is to remain anchored in U.S. assets, use fixed income for protection, and avoid making large allocation shifts based on short-term headlines. Earnings resilience and policy support can sustain markets, but variant and geopolitical risks argue for discipline and diversification.