Monthly Market Pulse: November

Macro Views

Fiscal Policy

With the election of Mike Johnson (R-LA) as House Speaker, a government shutdown may be avoided this year. With that said, the temporary extension of spending authority that looks increasingly likely by the Nov. 17 deadline will not resolve underlying policy disagreements, in our view. Uncertainty around government spending may pose downside risk to growth in coming quarters. Unlike in the US, deteriorating fiscal outlooks in many Euro area countries are being met with policy support at both the country and EU level. Read More

Housing

The sharpest decline in home prices is likely behind us, but elevated mortgage rates may weigh on the market throughout 2024. Current borrowers have little incentive to move homes as nearly 99% of them have outstanding mortgages lower than market rates. As such, GIR expects weak existing home sales and modest home price growth of 1.3% in 2024 as rates weigh on affordability, but supply remains tight. Read More

Consumer

Continued job gains and positive wage growth in the US could lead to real income growth of 3% and 4% in 2023 and 2024, respectively. As a result, we expect consumer resilience despite subdued sentiment. In the Euro area, consumer spending may pick up as delayed wage negotiations aid a recovery in real income growth. Read More

Corporates

Higher interest rates have introduced concerns for corporate expenses, but we do not expect a major uptick in defaults. Many companies who capitalized on low rates over the last decade have also earned positive net interest income, reenforcing IG credit strength. Read More

Market Views

US Rates

US Treasury yields have reached their highest levels since 2007 on strong growth momentum and elevated government bond issuance. Much of the increase in supply may still be ahead of us, but we expect that yields are likely nearing their peak. History shows that following a short-term 100 bp rise in the 10-Year US Treasury yield, a retracement of ~40 bps follows in the subsequent 3 months. Moreover, we expect yields to edge lower in coming months on the back of weaker 4Q growth and tighter financial conditions. Read More

Oil

The ongoing conflict in the Middle East has placed upward pressure on oil prices, more than offsetting any price softening caused by high levels of US oil production. GIR accordingly maintains their 12-month Brent forecast at $100/bbl, but risks skew to the upside if an escalation in the Middle East leads to a reduction in Iranian supply. Read More

Earnings

Aggregate S&P 500 earnings have surpassed consensus expectations thus far. In 2024, excitement in the AI space and supportive fiscal policy may encourage S&P 500 firms to prioritize growth investments over returning cash to shareholders. Although investor focus has narrowed in on signs of balance sheet strength such as cash balances and dividend payments, these growth investments may potentially provide longer-term payoffs. Read More

China Equities

Three sectors of the Chinese economy have emerged as new sources of growth: battery, EVs, and renewable energy. However, we expect real GDP in China to slow due to downturns in the property and real estate sectors and weakening consumption. With macro conditions posing a significant challenge for Chinese equities, exposure to secular growth trends and strong company fundamentals is key. Read More

Nearing the Finish Line

Rising interest rates since August have served as a key input to the selloff in longer-duration stocks, and as a result, US large-cap equity indices. Although painful for many, recent repricing may have temporarily resolved one challenge plaguing the S&P 500 this year: extended valuations alongside higher rates. While still far from cheap, more reasonable valuations in mega-cap tech and a favorable technical backdrop suggest US large-cap equities may still experience upside through year-end.

DIGESTING HIGHER RATES

The rapid rise in the 10-Year UST yield in recent months has been a key driver of mega-cap underperformance, in our view. While these stocks tend to absorb modest rate increases well, they have lagged the rest of the S&P 500 when outsized movements occur over a short period of time. With that said, we believe the bond market selloff is mostly behind us and intermediate rates should settle lower in the year ahead, potentially removing a key headwind to the index’s most influential stocks.

Source: Goldman Sachs Global Investment Research and Goldman Sachs Asset Management.

SEARCHING FOR AN ENTRY

What’s bad for the goose may be bad for the gander. In a concentrated market, the same can be said for the index’s largest stocks and its remaining constituents. Though, pain today may represent opportunity tomorrow. As mega-cap tech P/E multiples have fallen below five-year averages, so too has that of the index. For investors seeking core exposure in US large-cap equities, valuations today may be less of an impediment than they have been for the majority of the year.

Source: Bloomberg and Goldman Sachs Asset Management.

FINISHING STRONG

Historical periods of S&P 500 total returns greater than 10% from January through July followed by a drawdown from August through September have yielded strong fourth quarter returns. Specifically, the index has provided fourth quarter returns of 6.3%, on average, while delivering positive performance in every instance. The recent rate surge may have delayed this rally, but history suggests a strong close to the year may still be achieved.

Source: Bloomberg and Goldman Sachs Asset Management.

“We” refers to GS Asset Management. Mega-cap tech companies refer to AAPL, MSFT, AMZN, GOOGL, NVDA, TSLA, and META. Top Section Notes: Source: Goldman Sachs Global Investment Research and Goldman Sachs Asset Management. As of October 1, 2023. UST yields refers to US Treasury yields. Middle Section Notes: Source: Bloomberg and Goldman Sachs Asset Management. As of October 26, 2023. P/E multiples refer to forward 12-month price-to-earnings multiples. Bottom Section notes: Source: Bloomberg and Goldman Sachs Asset Management. As of October 12, 2023. Past performance does not guarantee future results, which may vary.

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September 2023

Micro-Scope

Many predicted a technical recession, earnings recession, or both heading into this year, reflected by portfolios positioned tactically defensive. In reality, growth has surprised to the upside, inflation has moderated, and investor sentiment has been overtly risk on. Though the direction of monetary policy remains uncertain, growth risks have partially faded, and thus, we feel that now is the time to focus on long-term positioning.