Menu Our services in the selected location:
  • No services available for your region.
Select Location:
Remember my selection
Your browser is out of date.

Investment Ideas 2022: Explore three key themes dominating markets where investors might uncover potential opportunities. Read More

   

ALL IN FOR INCOME

November 17, 2022  |  3 Minute Read


Maria Li

Senior Market Strategist, Strategic Advisory Solutions

Maria Li


Market volatility has been a story of 2022, with sharp price swings seemingly becoming the norm. The S&P 500 saw 70 all-time highs in 2021, accompanied by just 55 days of greater than 1% moves. But so far this year, the S&P 500 has registered only one all-time high and has had 105 days with moves greater than 1%. In our view, the array of macro headwinds ranging from sticky inflation to geopolitical tensions are likely to persist. As such, we believe investors may benefit from deriving a greater proportion of forward returns through stable cash flow over the uncertainty of price risk.

 

Equity Dividend Income

Equity markets have tended to see valuations contract and earnings decline during past periods of macro weakness. We see a similar backdrop today, with US economic growth inextricably linked to the trajectory of tighter financial conditions. In our view, equity prices may continue to trade sideways until clear signs of inflation containment are present. Ultimately, we believe that so long as higher real interest rates remain a source of upside risk, equity prices may have a way to go before seeing a sustainable rally.

 

While equity prices have been challenged, equity dividend income has proven more resilient. Historically, recessions have featured sharp earnings pullbacks of -13%, on median. Meanwhile, S&P 500 dividends only declined by a median of -1% in such instances. With forward 12-month price targets on US and European stocks expected to remain flat relative to current levels, we believe the case for income is even more powerful today. As shown in Exhibit 1, expected dividend yield for the next year is estimated to comprise a significant share of total equity returns in each region, and a much greater share than was the case in the past decade. Pockets of the equity market with a value orientation may realize an even greater share of returns in dividends than their growth-tilted counterparts. In a world where equity prices may revisit recent lows, we think that equity dividend income can act as a buffer against price volatility.

 

 

Exhibit 1: Dividends Driving Returns

 

Source: Bloomberg, Goldman Sachs Global Investment Research, and Goldman Sachs Asset Management. As of October 31, 2022. “GIR” refers to Goldman Sachs Global Investment Research. “NTM” refers to next twelve months. The economic and market forecasts presented herein have been generated by Goldman Sachs Asset Management for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary.

 

 

Fixed Income

The equity market is not the only place to look for income. The recent headwind of rising future interest rates may finally be giving way to higher starting interest rates, with investors now able to benefit from greater coupons. In Exhibit 2, we show the magnitude of yield surges across different fixed income sectors on the year. With peak policy hawkishness in the US likely behind us, current yields across taxable and tax-exempt bonds have more than doubled in this year, potentially providing a buffer against additional duration risk.

 

 

Exhibit 2: More Income in Fixed Income

 

Source: Bloomberg and Goldman Sachs Asset Management. As of October 31, 2022. “Treasuries” refer to the US Treasury component the Bloomberg US Aggregate Bond Index. “Agg” refers to the Bloomberg US Aggregate Bond Index. “MBS” refers to the Mortgage-Backed Securities component of the Bloomberg US Aggregate Bond Index. “ABS” refers to the Asset-Backed Securities component of the Bloomberg US Aggregate Bond Index. “IG Corporate” refers to the Bloomberg US Corporate Investment Grade Index. “HY Corporate” refers to the Bloomberg US High Yield Corporate Index. “IG Municipal” refers to the Bloomberg Municipal Bond Index. “HY Municipal” refers to the Bloomberg Municipal High Yield Index. “TEY” refers to tax-equivalent yield for municipal bonds. “Tax-equivalent yield” refers to yield divided by one minus the current tax rate. A 40.8% tax rate is used to calculate tax-equivalent yield for current period. Goldman Sachs does not provide accounting, tax, or legal advice. Please see additional disclosures at the end of this document.

 

 

Global central banks are unwavering in their efforts to tame inflation. Combined with myriad other known and unknown risks, the market backdrop is likely to remain challenged. Consequently, we favor income strategies, across both equity and fixed income markets, to smooth out near-term price swings and secure more durable returns going forward.

 

 

 

 

Related Insights

Start the Conversation

Committed to providing you with the insights you need to build your practice.

 

Glossary

“Volatility” is a measure for variation of price of a financial instrument over time.

“Hawkishness” refers to a state of less accommodative monetary policy.

Index Benchmarks

The S&P 500 Index is the Standard & Poor's 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices. The index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index.

The Euro Stoxx 600 Index represents the performance of 600 publicly-traded companies based in one of 18 EU countries.

The Bloomberg US Aggregate Bond Index represents an unmanaged diversified portfolio of fixed income securities, including US Treasuries, investment grade corporate bonds, and mortgage backed and asset-backed securities.

The Bloomberg US Corporate Investment Grade Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

The Bloomberg US High Yield Corporate Index measures the USD-denominated, high yield, fixed-rate corporate bond market.

The Bloomberg Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term tax-exempt municipal bond market.

The Bloomberg Municipal High Yield Index covers the non-investment grade municipal bond market.

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns.

Investors cannot invest directly in indices. The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein.

Risk Considerations

Equity securities are more volatile than fixed income securities and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.

Investments in foreign securities entail special risks such as currency, political, economic, and market risks. These risks are heightened in emerging markets.

Emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks, including but not limited to currency fluctuations and political instability.

Investments in fixed-income securities are subject to credit and interest rate risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Bonds are subject to interest rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates.

Although Treasuries are considered free from credit risk, they are subject to interest rate risk, which may cause the underlying value of the security to fluctuate. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT).The above are not an exhaustive list of potential risks. There may be additional risks that are not currently foreseen or considered.

Goldman Sachs does not provide legal, tax or accounting advice, unless explicitly agreed between you and Goldman Sachs (generally through certain services offered only to clients of Private Wealth Management). Any statement contained in this presentation concerning U.S. tax matters is not intended or written to be used and cannot be used for the purpose of avoiding penalties imposed on the relevant taxpayer.  Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind.  Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness.  We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security. Views and opinions are current as of the date of this commentary and may be subject to change, they should not be construed as investment advice.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice.  These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client.  Actual data will vary and may not be reflected here.  These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes.  These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

Goldman Sachs does not provide legal, tax or accounting advice, unless explicitly agreed between you and Goldman Sachs (generally through certain services offered only to clients of Private Wealth Management). Any statement contained in this presentation concerning U.S. tax matters is not intended or written to be used and cannot be used for the purpose of avoiding penalties imposed on the relevant taxpayer. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction

This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

Date of first use: November 16, 2022. 298216-OTU-1704002.

Please enter your email address to continue reading.

Confirm Your Access


An email has been sent to you to verify ownership of your email address.

Please verify the link in the email by clicking the confirmation button. Once completed, you will gain instant access to our insights.

If you did not receive the email from us please check your spam folder or try again.