America Powers On: Why US equities are still poised to outperform in 2024

Episode Summary

Executive Summary: Goldman Sachs ISG head Sharmine Masavar-Ramani says 2023’s outsized U.S. equity rally was driven by an avoided recession, better-than-expected earnings, easing inflation, and the Fed pivot. For 2024, she expects more modest returns: about 6% for the S&P 500, with valuations still high and limited case for major rotation out of U.S. stocks.

Main Topics: Why U.S. equities surged in 2023 (Priority: 5/5): The team’s bullish 2023 call was rooted in recession skepticism, historical rebound patterns after large drawdowns, mid-single-digit earnings growth, improving GDP and margins, and later reinforcing factors like better earnings, falling inflation, and the Fed pivot. 2024 market outlook for U.S. stocks (Priority: 5/5): They expect positive but much smaller returns than 2023—roughly 6% for the S&P 500 in the base case and low-to-mid teens in the upside case—because much of the good news is already priced in and multiples may contract. Valuations and U.S. versus non-U.S. equities (Priority: 5/5): Although non-U.S. markets look cheaper on the surface, Goldman argues sector-weight differences distort comparisons. After adjusting for sector composition and growth prospects, the case for tactically shifting away from U.S. equities weakens. China and emerging markets (Priority: 4/5): China is the cheapest major market, but Goldman still advises against tactically moving into it due to slower expected GDP growth, regulatory uncertainty, and geopolitical/de-risking pressures. Asset allocation and staying invested (Priority: 4/5): With equities, bonds, and cash all offering relatively similar returns, Goldman does not see enough advantage to justify major portfolio shifts, especially for taxable investors facing large capital gains taxes. Tactical tilts and risks (Priority: 4/5): The team’s preferred niche exposures include MLPs in energy infrastructure and long physical uranium. The biggest macro risk to the outlook is escalation of the Israel-Hamas conflict, which could affect growth, risk premia, and oil prices.

Key Arguments: 2023’s strong equity performance was not a surprise to Goldman because bearish sentiment was extreme after 2022’s drawdown and recession odds were high, which historically tends to precede rebounds. They did not think a recession was highly likely in early 2023, unlike market consensus, and that positioning allowed them to stay constructive. The 2024 outlook is weaker mainly because valuations are already lofty and future returns are starting from a higher base. Valuations alone are a poor short-term timing tool; earnings, flows, inflation, and rate expectations matter more over the next 12 months. Non-U.S. markets often look cheaper because their sector mixes are less technology-heavy and more energy-heavy; once adjusted for sector weights, the discount narrows materially. China remains unattractive tactically despite cheap valuations because growth is slowing and policy/regulatory risks remain high. U.S. preeminence is supported by durable advantages: scale, GDP per capita, natural resources, labor productivity, corporate management quality, innovation, rule of law, and capital markets depth. For many clients, the expected return gap across equities, bonds, and cash is too small to justify realizing large taxable gains and moving aggressively between asset classes. The most compelling tactical opportunities are specific niches, especially MLPs in energy infrastructure and physical uranium, rather than broad market rotations. The chief geopolitical risk is escalation in the Middle East, which could raise oil prices and equity risk premia even without major supply disruption.

Data Points: S&P 500 return in 2023: up 26% - Actual market performance referenced as the backdrop for the discussion 2023 base-case forecast for S&P 500: 13% - Goldman’s forecast one year earlier for U.S. equities 2023 upside case forecast for S&P 500: closer to 30% - Goldman’s optimistic scenario last year 2024 base-case forecast for S&P 500: about 6% - Current base-case return expectation for U.S. equities 2024 good-case forecast for U.S. equities: low to mid-teens - Upside scenario for 2024 2023 intraday equity market decline from high to low: about 28% - Used to illustrate the severity of the 2022 bear market Bloomberg consensus recession expectation: 68% - Market consensus recession odds at the start of 2023 Goldman internal recession probability: 50% - Their own recession estimate at the start of 2023 Peer recession probability mentioned: 35% - GIR colleagues Jan Hatzius and David Mericle’s estimate Historical average market return 12 months after big downdrafts: 23% - Used to support their bullish stance after 2022 weakness Historical average market return 24 months after big downdrafts: 32% - Further historical context for rebound expectations Expected 2023 GDP growth: 1.5% to 2% - Assumed U.S. economic growth in the bullish framework Expected 2023 earnings growth: mid-single digit - Goldman’s earnings assumption for U.S. equities S&P 500 in the 10th decile of valuation: Cheaper only 10% of the time historically - Indicates very rich valuation levels U.S. earnings share from technology: about 29% to 30% - Used to explain sector-composition differences versus non-U.S. benchmarks Technology sector market multiple: around 27 - Illustrative valuation for tech Energy sector market multiple: around 11 - Illustrative valuation for energy China 10-year average GDP growth pre-COVID: 7.7% - Historical growth rate cited for China China expected average GDP growth next 10 years: 3.4% - Goldman’s forward-looking estimate Long-run China GDP trend target: about 2.5% - Expected downward drift over time MSCI All-Country World Index base-case return: 7% - Broad global equity return expectation Other non-U.S. developed markets return example: around 8% - Return expectation cited for regions such as Japan Bond return expectation: 4% to 5% - Typical fixed-income outlook Cash return expectation: about 5% - Expected cash yields/returns Tax break-even for California/New York investors: about a 20% market decline - Illustrates how much equities would need to fall to offset taxes when selling large gains Energy sector weighting in U.K. equities: 1% tech share mentioned as comparison point - Illustrates why non-U.S. benchmarks can look cheaper due to sector mix ESG-related uranium price appreciation: incredible appreciation last year - Qualitative but notable move in uranium prices

Pivotal Quotes: "Our base case for this year for U.S. equities is mid-single digit. We're saying about 6% for the S&P 500, for example." — Sharmine Masavar-Ramani: Her 2024 outlook for U.S. stock returns "Valuations actually do not explain much of the returns for the next 12 months." — Sharmine Masavar-Ramani: Her response to concerns that rich valuations justify an immediate rotation out of U.S. equities "The 21st century still belongs to the United States." — Sharmine Masavar-Ramani: Her explanation of the long-running U.S. preeminence investment theme

Implications: Listeners should expect a constructive but more modest 2024 for U.S. assets, with staying invested favored over big rotations. The main watch items are earnings, rates, and geopolitical escalation, not just valuation headlines.