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    MARKET PULSE 
    |
    March 2024

    MARKET PULSE | March 2024

    Macro Views

    Manufacturing

    Depressed manufacturing activity has been driven by inventory destocking that corrected for an overshoot in 2022, a shift in consumer spending from goods to services, and weak growth in China. In the US specifically, ISM manufacturing activity has contracted for 16 consecutive months, its third longest streak on record. With that said, we believe manufacturing activity has troughed and is poised for a rebound due to 1) resilient global growth, 2) impending monetary easing, and 3) increasing new orders. Read More

    Growth

    International economic growth stalled in the second half of 2023, with both Japan and the UK entering technical recessions. Regarding the former, rising tourism and our expectation of higher wages coming out of Shunto Wage Negotiations may provide a boost to consumption and in turn, demand-led inflation. Rising demand alongside corporate reform aimed at improving the financial positions of Japanese corporations should have stronger influence over future equity market performance than recent growth weakness, in our view. Read More

    Monetary Policy

    The US has experienced a slight delay in disinflation, though we believe this reflects the lagged effects of strong wage growth in 2023, which may fade in coming months. With that said, FOMC members have expressed more concern about the risk of reflation than potentially weak growth caused by overly restrictive rates. As such, GIR now expects the Fed to deliver its first rate cut in June (previously May). A similar bias remains among BoE officials, informing GIR’s expectation of the first bank rate cut to also be delivered in June. Read More

    Market Views

    European Equities

    The GRANOLAS, eleven companies that have exhibited strong earnings growth, high & relatively stable margins, and low volatility, contributed to over 50% of the STOXX 600 performance over the past twelve months, comparable to the Magnificent 7’s contribution to S&P 500 returns. The GRANOLAS have historically offered better risk-adjusted returns than the Magnificent 7 and are currently priced at a 30% P/E discount. We expect both mega-cap baskets to deliver strong performance in the short and medium term. Read More

    US Equities

    The current earnings season highlights ongoing fundamental strength of the Magnificent 7 stocks; EPS has grown by 60% year-over-year for these seven names, versus a modest EPS contraction for the rest of the S&P 500. Accordingly, GIR has raised their year-end S&P 500 price target to 5200 on the back of a stronger 2024 EPS estimate of $241 (previously $237), reflecting 8% year-over-year growth. Read More

    Rates

    Short-end rates may remain stickier than previously expected given the Fed’s recent hawkish bias, though we believe that longer-dated fixed income is poised to outperform cash in the near-term. Investors waiting for a signal, such as the dis-inversion of the yield curve, may be disappointed, as intermediate yields have historically fallen prior to such dis-inversions. In turn, we favor neutral portfolio duration positioning. Read More

    Small Caps

    We expect small cap performance to be robust in the next twelve months, barring a US recession. The Russell 2000 has historically outperformed the S&P 500 in US presidential election years by a median of 7 pp. Additionally, monetary easing has historically benefitted smaller, more financially-levered companies, with small caps outperforming large caps by 11 pp in the 12 months following the Fed’s first policy rate cut. Read More

    Around the World

    Equity markets today offer a balanced opportunity set regionally relative to the last market cycle, in our view, as key US indices have pulled forward optimistic investor expectations of lower inflation and resilient growth. With that said, we believe investing abroad should not be done with a broad brush, as we find that each region is home to unique prospects and challenges. Taking a trip around the world, we highlight trends that may drive future performance in three key regions: Japan, Europe, and India.

    JAPAN: AMPLE BUYING POWER

    Inflation has been a burden for many economies over the last couple of years. For Japan however, it is a welcome development after deflationary pressures of prior decades have entrenched a conservative approach among domestic investors, with Japanese household equity participation still near just 10%. Declining real yields on cash investments alongside renewed equity market tax incentives for retail investors may serve as catalysts for a new source of flows into Japanese equities.

    Source: Bloomberg, BoJ, and Goldman Sachs Asset Management.

    EUROPE: QUALITY GROWTH COMPOUNDERS

    Similar to the US, Europe’s equity market has been dominated by a handful of companies: the GRANOLAS. This group of 11 stocks drove over 50% of STOXX 600 returns last year and has delivered the same performance as the Magnificent 7 since 2021, with roughly half of the volatility. These quality growth compounders have promising characteristics, investing 3x more in their future growth than the rest of market while trading at a reasonable 20x price-to-earnings ratio.

    Source: Goldman Sachs GIR and Goldman Sachs Asset Management

    INDIA: GETTING WHAT YOU PAY FOR

    The BSE Sensex justifiably trades at a slight premium to its 10-year average, in our opinion. Rising income levels, favorable demographics, and government capex spending are a few measures which may support strong economic growth in the coming years. Importantly, over the last decade, India has been one of the few emerging markets that has demonstrated a tight relationship between economic growth and market returns, suggesting strong expected future growth may translate to further index gains.

    Source: MSCI, FactSet, and Goldman Sachs Asset Management.
    VIEW LESS DISCLOSURE

    “We” refers to Goldman Sachs Asset Management. Top Section Notes: Source: Bloomberg, Bank of Japan, and Goldman Sachs Asset Management. As of February 27, 2024. Middle Section Notes: Source: Goldman Sachs Global Investment Research and Goldman Sachs Asset Management. As of February 12, 2024. “GRANOLAS” refers to the 11 largest European companies by market capitalization. Bottom Section notes: Source: MSCI, FactSet, and Goldman Sachs Asset Management. As of January 23, 2024. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that forecasts will be achieved. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary.

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