Markets

How we produce and consume electricity is changing fundamentally. In Europe, the capacity of renewable energy sources is growing very rapidly, while traditional power plants are slowly being decommissioned. That’s creating a unique new opportunity for investors amid the emerging demand for battery storage, which provides balance to electricity markets. “With energy storage, there’s a new and interesting asset class emerging, and the business model is fundamentally different to that of wind and solar,” says Ingmar Grebien, who leads GS Pearl Street and is a managing director in Goldman Sachs Global Banking & Markets. GS Pearl Street is a platform for trading and financing solutions for clean energy technology. Overall, total energy storage in Europe is expected to increase to about 375 gigawatts by 2050, from 15 gigawatts last year, according to BloombergNEF. We spoke with Grebien about electricity market trends, energy storage technologies, as well as the investment and financing opportunities emerging from these technologies.  What sort of challenges does the rise of renewables pose for European electricity markets?  By 2050, you’ll have about 72% of electricity produced by wind and solar in Europe, which is a massive increase compared to the 30% we have currently, according to BloombergNEF data. This is really a profound structural change in the electricity market. And it’s here to stay. Now, that’s great from a decarbonization perspective. But it also results in issues with regards to the timing and certainty of supply, because renewables are intermittent sources of power. When there’s no wind or no sun, there’s also no power production. Imagine a world where the light switch only works if the sun shines or the wind blows. As renewables penetration rises, there are increasing imbalances between consumption and production. That can result in market volatility and in some instances extreme price scenarios. For example, some European markets such as the Netherlands or Belgium have already started to see a significant increase in negative hourly prices directly correlated with the rising share of solar and wind power.  Energy storage is the key to shifting electricity and resolving those structural issues in a low-carbon way. What opportunities does energy storage offer for investors? With energy storage, there’s a new and interesting asset class emerging, and the business model is fundamentally different to that of wind and solar.  Wind and solar assets generate revenues by selling electricity and therefore depend on the absolute level of electricity prices. The rapid increase in renewable assets that all generate at the same time and with low marginal cost of production means that there’s a long-term risk of lower electricity prices, lower capture rates, and lower revenues for those assets.  The exact opposite is true for energy storage. Energy storage is shifting electricity, and it makes money from buying, selling, and trading the difference between low- and high-priced hours in the market. Storage assets therefore depend on price spreads, which tend to be higher with more imbalances. Imbalances, in return, are driven by more renewables. Energy storage is therefore well-positioned for an electricity market dominated by renewables and represents an interesting new asset class. It’s also a potential hedge for players who already have classic renewable portfolios. Compared to classic renewables, energy storage has really only become an investable asset in Europe over the last few years on the back of technology advances, market price signals, and government support mechanisms. Overall, market research such as Bloomberg NEF predicts that grid-scale energy storage in Europe will increase to about 375 gigawatts in 2050 from 15 gigawatts last year.  Goldman Sachs, through its GS Pearl Street platform, is at the forefront of financing energy storage projects across Europe and provides market leading trading and route-to-market services.  What are the key technologies to watch out for in the storage space?  For short-duration energy storage projects, utility-scale lithium-ion batteries have emerged as the dominant technology choice. The average cost of lithium-ion battery packs has decreased by more than 80% over the last decade due to technological advances and economies of scale. At the same time, the performance and the longevity of the technology has improved. This has resulted in lithium-ion becoming a bankable technology. But the final verdict on energy storage technology has not been made, in particular for longer-duration storage applications There’s a range of other new technologies that could solve the problem. Sodium-ion batteries for example are potentially a hot contender for large grid-scale storage systems, where high energy density is less important. Other technologies such as liquid air storage, flow batteries, compressed air storage, and gravity applications could all solve the long-duration energy storage problem for electricity markets. However, for the moment these alternative technologies tend to be less mature compared to lithium-ion storage systems. What are the key revenue drivers for storage providers?  For short-duration energy storage assets, there are really three key revenue streams for energy storage assets in Europe.  The first one is capacity payments, which have become a broadly implemented policy measure by governments to support system reliability and incentivize the installation of certain new power asset types. Capacity contracts tend to be bilateral contracts with governments, for up to 15 years. They’re awarded by auction, and storage providers essentially get paid to build the assets. They provide a fixed revenue stream, the amount of which varies country by country. The second revenue stream is ancillary services. These are market mechanisms designed to provide a service to the grid operator, who must ensure that consumption balances perfectly with production at any time and address any resulting frequency deviations from imbalances between electricity consumption and production. To do that, they need to be able to call on assets to perform certain actions such as ramping up or down at very short notice. Ancillary services are procured by the grid operator on a daily basis, with storage assets free to participate in the various auctions the asset qualifies for. The third type of revenue comes from wholesale markets, and it’s really arbitrage trading. You’re buying electricity more

   Goldman Sachs Research’s forecast for the S&P 500 Index of stocks is broadly the same as it was before Donald Trump won the US presidential election. Beneath the surface, however, the outlook has changed substantially for some sectors. The S&P 500 is still projected to climb some 9% to 6300 in the next 12 months, David Kostin, chief US equity strategist at Goldman Sachs Research, writes in the team’s report. Our researchers forecast growth in earnings-per-share of 11% in 2025 and 7% the year after, though Kostin points out that those estimates may change as more about the new administration\’s policy agenda is revealed. “Robust earnings growth should drive continued equity market appreciation into next year,” he writes.    The S&P 500 rallied to a record high the day after the presidential vote as uncertainty about the outcome faded. “I don\’t think many people had it in their playbook that we would know the next president by 11 am on Wednesday,” says Brian Garrett, head of Equity Execution on the Cross Asset Sales desk in Global Banking & Markets at Goldman Sachs. Previous US elections have taken days or longer to play out, and Garrett highlights that the two-day normalized decline in the VIX (the CBOE Volatility Index) was one of its largest in the past decade. US stocks surged in part because many clients had reduced the amount of risk in their portfolio amid uncertainty about the results of the election, Garrett says on an episode of Goldman Sachs Exchanges. Investors have since re-engaged some of the trades that were successful after the 2016 presidential race, such as buying financials, small caps, technology, and energy stocks, he says. The resolution of political uncertainty is a key, near-term driver for stocks and tends to drive strong year-end returns following a presidential election, Kostin writes. The S&P 500 index has historically generated a median return of 4% between Election Day in November and calendar year-end. Combined with the recent resilience in economic growth data and the expectation for more rate cuts by the Federal Reserve, the near-term outlook for US equities is “healthy,” he writes. How Treasury yields may influence US stocks A sharp increase in 10-year Treasury yields, which would increase borrowing costs and impact valuations, would probably limit the magnitude of any potential rally in stock prices. Ten-year yields have risen to about 4.4% from a low this year of 3.6%. Kostin points out that such an increase in interest rates would usually be accompanied by a decline in equity prices. But in this case, stocks have been unperturbed by the rise in yields because it has mostly been driven by better economic data in the US. While the US presidential Inauguration Day is still months away, investors are rotating their holdings within stock portfolios according to expectations for policy changes. Recent correlations between baskets of equities and election prediction markets indicate that financial, fossil fuel, and small capitalization companies will outperform the broader market, and renewable energy stocks will lag behind. The impact of US tariffs on stocks, M&A, and IPOs Many investors are focused on trade policy, and Trump may implement some tariffs without legislation. Our economists expect the president-elect will impose tariffs on imports from China that average an additional 20 percentage points. European companies may also face tariffs, and the impact of trade uncertainty could cause a larger economic hit than the tariffs themselves, according to Goldman Sachs Research. During the trade conflicts in 2018-2019, in Trump’s previous administration, domestic-facing and defensive industries such as utilities, telecom services, and real estate tended to outperform, while automobile, capital goods, and technology hardware stocks underperformed. There are reasons to think mergers and acquisitions will increase under a Trump administration. While it will take time for policy uncertainty to recede, antitrust regulation could be more relaxed under the Republican president. Continued economic expansion and an increase in confidence among CEOs may also underpin a rise in corporate combinations. Goldman Sachs Research estimates that $4 trillion of corporate spending in 2025 will be roughly evenly split between returning cash to shareholders (buybacks and dividends) and investing for growth (capex, research and development, and M&A). The number of IPOs may rise. Goldman Sachs Research’s IPO Issuance Barometer assesses how conducive the macroeconomic environment is for new equity issuance.       A reading of 100 represents an environment that is consistent with the typical historical frequency of IPOs. The barometer rose to 201 in June 2021 at the peak of the post-Covid issuance boom and fell to a nadir of 7 in September 2022. It now stands at 137, reflecting the solid macroeconomic environment for new issuance, according to Goldman Sachs Research.

   Goldman Sachs Research expects European stocks to rally in 2025 even as the region faces headwinds from political and trade uncertainty and slow economic growth. The STOXX 600 index, made up of European and UK companies, is forecast to generate a total return of about 9% next year (as of 19 November 2024) — which is modestly lower than Goldman Sachs Research’s projections for the index\’s US and Asian counterparts. We sat down with Goldman Sachs Research senior strategist Sharon Bell to discuss the Europe equity strategy team’s outlook for stocks in 2025. The report, which is titled “2025 Outlook: Peer Pressure,” shows that the team slightly lowered their forecasts for the STOXX 600 for next year. At the same time, Bell points out that European stocks may benefit from cooling inflation, a larger than expected European policy response, or concerns about the prospect for returns from mega-cap US stocks.  Why did the team downgrade its STOXX 600 target prices for the next year? We’re below consensus on growth: We’ve downgraded our economic figures and our earnings expectations for Europe in the last few months. Given all of that, we’ve also downgraded our price targets very slightly. Europe has also seen a modest rise in risks. The stability of the fiscal situation in France, Italy, and to some extent the UK, is being questioned, for example. Economic data has been weak, and the manufacturing cycle, which particularly impacts Germany, has been really dire. The news is not recessionary — it’s nowhere near as bad as what we saw in the financial crisis, the sovereign crisis, or the pandemic — and that’s why it’s a small downgrade. But there is undoubtedly an accumulation of risks along with weaker growth. What sectors are you optimistic about? We anticipate that the European Central Bank will bring interest rates down to 1.75% by the middle of next year (from 3.25% in October). Lower interest rates ought to create some opportunities in more indebted sectors like telecoms, and in areas that are sensitive to interest rates, like real estate. We also expect consumer-facing areas — like retailers and travel companies — to be a bit more robust, because they benefit both from interest rates coming down and also from the fact that they’re not exposed to trade concerns and tariffs, because they’re catering to a more domestic consumer in Europe. Do lower rates also benefit smaller companies rather than bigger ones? These companies tend to be more indebted, and to have more floating debt. So interest rates coming down would help them a lot. We also expect M&A activity to pick up — we’re already seeing signs of that coming through. That also tends to help the small- and mid-sized companies, because they’re more likely targets of acquisitions. Given rates coming down and M&A activity picking up, one would expect small- and mid-caps to do well. The only problem is that they are also cyclical — they’re very sensitive to economic growth, which remains very weak. We haven’t made a strong call for mid-caps, but I can certainly see the positive case for them at the moment. How might exchange rates impact European stocks? With all other things equal, lower interest rates will push down European currencies. It’s fair to say that the euro has already come down relative to the dollar, reflecting the weaker economic environment in Europe, and the stronger one that we’ve seen in the US recently. Normally, a falling domestic currency benefits local companies, who often make some of their money outside of Europe in dollars or other currencies, and end up making more money when they convert that back into euros. This is part of the reason why companies aren’t too worried about the decline in currency — because it makes their business more competitive, for one thing. If the euro is falling, companies with euro-area costs will also see those expenses coming down relative to companies with dollar costs. So from a competitiveness angle, the currency coming down is a good thing. However, I don’t think it actually benefits equities overall. If you look at periods when the euro has been weak (or when sterling has been weak, in the case of the UK market), they have been associated with weaker equities. And one of the reasons is that equities are a very risk-sensitive asset. Why are currencies coming down? It’s normally either because of a risk event like a sovereign problem (as in the case of France recently), or because people are very worried about economic growth. Neither of those is likely to benefit equities. A falling euro also discourages foreign investors from buying European equities. US investors are a large player in European stocks, and if they believe that they are going to lose on the currency fallout, then they will be put off from investing more. In terms of economic performance, which region is most important for European companies: the US, the EU, or China? We often ask this exact question: What matters more for Europe? We have a weak view on European growth, but we have an above consensus view on the US, and we think that China will see a stimulus that helps growth next year. Most of European companies’ sales are to Europe. But that component — sales to Europe — hasn’t been growing at all in the last twenty years. All of European companies’ growth has come from sales to China and the US. So Europe is very reliant for its growth on those regions. We like companies with US exposure for a couple of reasons: one is that they are exposed to a stronger economy, so over time they should get better sales and earnings; another is that they are dollar earners, by definition, and so they should benefit from a stronger dollar; and finally, in Europe, corporate taxes are generally going up, whereas in the US you may even see some taxation benefit. The fear for these companies is that

   UK government bond yields have risen amid investor concern about the government’s fiscal outlook and sticky inflation. Even so, Goldman Sachs Research projects the country’s borrowing costs will decline by the end of the year as the Bank of England cuts its policy rate. “We still think the UK data will justify more cuts than the market is pricing,” says George Cole, head of European rates strategy in Goldman Sachs Research. Our strategists project 100 basis points of cuts in 2025, compared with the 41 basis points of cuts that’s priced into the bond market. The team forecasts 10-year gilt yields will fall to about 4% by the end of 2025 from 4.9% (as of January 13), the highest since 2008. British bond yields, along with those of many governments, have been climbing since September. Cole says one simple reason for the broad increase in borrowings costs is that there’s a lot of government borrowing. The US ran a $1.8 trillion budget deficit last year, which was about 6% of GDP. The budget deficit in France was around 6%, and in the UK it was about 4.5%. “There are a lot of bonds to buy everywhere,” Cole says. Will central banks cut interest rates in 2025? While there are idiosyncratic reasons why gilt yields have increased in the past week, the US has been an important engine behind the rise in global interest rates. The Federal Reserve cut rates by 50 basis points in September, more than some investors had anticipated. But since then, the country’s economic data has been running hot — the US added 256,000 jobs in December, which was substantially more than economists had forecast. Goldman Sachs Research pushed back its forecast for Fed rate cuts from three cuts this year to two, with one in 2026, after the December payroll report. Investors have also questioned whether Trump administration policies such as tariffs will be inflationary. “We may be starting to learn that cutting cycles are not going to be quite as deep as we thought, because of the near-term stickiness in inflation,” Cole says. “We don\’t think that that’s something you should overstate. There are still going to be interest rate cuts to come. But at the more global level, we’re experiencing a slight difficulty in digestion because those expectations for rate cuts are being pared back.” Why gilt yields have risen UK government bond yields, with some exceptions, roughly tracked those of the US until last week. That’s when the pound depreciated against a trade-weighted basket of currencies and the stock market showed signs of softening. Those fluctuations show that investors are demanding more compensation, or a higher risk premium, to buy UK assets. “All UK assets need to get cheaper if that risk premium is going up,” Cole says. The increase in risk premium can reflect concern that enough isn’t being done to contain inflation, as well as worries about the outlook for deficits. In the UK, rising bond yields are pushing up government spending on interest expense, which could put the government’s budget plans at risk. A weaker currency could also drive up inflation. In addition, Cole points out that investors are mindful that there have been other examples of the gilt yields rising alongside a decline in sterling. That’s what happened in 2016 after Britons voted to leave the EU, sparking a bout of higher uncertainty in financial markets. There was a similar episode in 2022 after the government, among other things, unveiled a budget plan with unfunded tax cuts (the event was amplified by vulnerabilities in the pension sector). Those episodes had an impact on policy making and interest rates. So far, the British pound’s depreciation on a trade-weighted basis is small compared to previous periods of gilt market stress that sparked policy changes for interest rates, according to Goldman Sachs Research. At the same time, the government has taken steps to make UK pensions less sensitive to fluctuations in gilt yields, and expectations for economic growth, inflation, and the deficit are more positive than in 2022. Those factors make it less likely that there will be a sharp move higher in interest rates that causes financial stability concerns, Cole says. The outlook for gilt yields in 2025 Goldman Sachs Research forecasts a decline in 10-year yields of almost a percentage point, and our analysts expect inflation to cool enough for the Bank of England to cut rates next month. “We\’re fully aware that there is now slightly more fragility in that path toward the 4% mark,” Cole says. He points out that it all comes down to the data, and whether it allows the BoE to make a series of cuts below market pricing that will help the market absorb elevated bond supply. “What could go wrong, of course, is that inflation proves to be more persistent, or there is excessive currency weakness,” Cole says. “That’s important to note in the context of the strong recent US jobs report, and another bout of weakness in the pound. If that were to start to lead to more inflationary pressure, it could make it more difficult to get those interest rate cuts. But as it stands, we still think that the UK data will justify more cuts than the market is pricing.”

   Solid economic growth and the prospect of falling interest rates provide a backdrop for further gains in global equities. But soaring valuations over the past two years, particularly in the US, leave global stocks in a vulnerable position, according to Goldman Sachs Research. By the end of last year, the S&P 500 clocked one of its strongest two-year periods of returns for the index since 1928. Much of the rise in stocks reflects better fundamental growth than investors had expected, and rising valuations have been a significant contributor to recent performance. “The powerful rally in equity prices in recent months leaves equities priced for perfection,” Peter Oppenheimer, chief global equity strategist and head of Macro Research in Europe, writes in the team’s report. “While we expect equity markets to make further progress over the year as a whole — largely driven by earnings — they are increasingly vulnerable to a correction driven either by further rises in bond yields and/or disappointments on growth in economic data or earnings.” A decline in interest rates has been associated with strong equity returns in the past. In the US, for example, Federal Reserve rate-cutting cycles have often coincided with rising stock prices as long as the economy avoids slipping into recession.    Despite the favorable backdrop, the outlook for an ongoing stock rally is complicated by three main factors. First, the speed of recent gains in stock prices already reflects much of the good news that our analysts are expecting in terms of economic growth. Goldman Sachs Research finds that cyclical parts of the market are outperforming the defensive parts. “Much of the strength in equities in recent months has reflected higher growth expectations, particularly in the US where optimism on US deregulation and tax cuts have played a role,” Oppenheimer writes. “This leaves equities vulnerable to any growth disappointments, particularly depending on specific policy measures by the incoming US administration in relation to tax and tariff decisions.” Second, high valuations are likely to limit forward returns. The gains have left the US stock market at its 20-year peak, even after excluding the biggest technology companies. Other markets are much cheaper relative to the US, but their valuations are broadly in line with their long-term averages (outside of China). The third factor complicating the outlook for global equities is unusually high market concentration — by geography (the US has been increasingly dominant), by sector (technology has generated the bulk of equity returns), and by individual companies (the five biggest stocks in the US account for roughly a quarter of the index). Stocks are more vulnerable to growth disappointments because of the increased concentration of equity market returns, Oppenheimer writes. The large US technology companies known as the Magnificent 7 rose by 47% last year, versus a 10% gain for the median company in the S&P 500. “Encouragingly, the dominance of the largest US technology companies has reflected powerful fundamental growth rather than irrational exuberance,” Oppenheimer writes. “Nevertheless, the extraordinary ramp-up in capex spending that mega-cap technology companies are making is reducing free cash flow and the scale of future profit growth.” There’s also a growing disconnect between stock performance and interest rate expectations. US 10-year Treasury yields have climbed back above 4.5%, which is 100 basis points higher than in September. And expectations for further rate cuts in 2025, as indicated by fed funds futures, have dropped from 125 basis points of cuts as recently as September to less than 40 basis points. Even if the increase in yields is starting to look stretched, as our rates research team estimates, rising equity prices in the face of higher bond yields leaves little cushion for equities markets in the event that bond yields climb further.    The key takeaway for investors is that diversification has become more important in the year ahead, according to Goldman Sachs Research. For starters, the portfolio strategy team recommends considering geographic diversification. The surging US dollar has benefited companies in other countries that count on the US for a higher share of their revenues, but they are still much cheaper than their US counterparts. Companies outside the technology sector are an opportunity, particularly “quality compounders” — companies that generate steady profit growth throughout the economic cycle. There are also signs that equity correlations are declining, which could open up opportunities for stock picking.

   The world is going gray. As the population ages, the shift will have a profound impact on government tax revenue and policymaking as well as investment opportunities, according to Goldman Sachs Research. The global population is forecast to rise by about 20% by 2050, and seniors will make up a disproportionate share of overall growth. The number of people over age 65 is expected to double from 800 million to 1.6 billion in that time.  These global demographic trends are likely at an inflection point. The number of people under age 19 has already crested, evidence that total global population is headed toward a peak. Half of all countries in the world have a fertility rate below the replacement level of 2.1 births per woman. The shifts will be a major challenge for policymakers, as a declining working-age population exacerbates the risk of labor shortages and creates potential fiscal pressures for governments. Investors should also be mindful, as the fastest growing sectors of the economy are poised to change. Demand is likely to rise for healthcare, senior living and care, and certain types of entertainment and experiences, Goldman Sachs Research analyst Evan Tylenda writes in the team’s report. “Healthcare providers are set to benefit from shifts in spending associated with an aging population,” Tylenda writes. “We expect continued rising expenditures on nursing care facilities, residential long-term care facilities, home care, and rehabilitation services, particularly as life expectancy continues to rise.” Another area where spending could increase is for the types of entertainment and experiences that seniors favor. The researchers identified specific industries and companies that might be helped by the demographic trends and related changes in spending: Healthcare: As the population of older people surges in the coming decades, “increases in both personal and public spending on healthcare will be required to treat common health issues for an aging population,” Tylenda writes. This may boost medical technology companies, pharmaceutical makers with age-related treatments, and healthcare providers focused on age-related issues. In the US, people over the age of 65 account for 36% of health spending, according to the Medical Expenditure Panel Survey, despite making up only 18% of the population. Among seniors, per capita personal healthcare spending soars for cardiovascular disease, neurological disorders, diabetes, and a range of other conditions, compared with younger people.    Senior living: Demographic tailwinds may also increase demand for operators of nursing care and residential long-term care facilities and providers of rehabilitation services. Spending on nursing care in the US has been rising since 1960, but today there are still not enough facilities to accommodate the aging population. The UK is estimated to have a senior housing shortfall of more than 30,000 units within three years. Italy, Germany, and France lack sufficient nursing facility beds for their aging populations. At the same time, most seniors age at home, whether alone, with a spouse, or in a living arrangement with family members. In the US, just 2% of those over age 65 are in a group or care facility. Given this, the market is likely to grow for home care services. There should also be rising demand for technologies that facilitate home care with such things as medication management, telehealth services, and hygiene. Entertainment and experiences: Older populations spend their time and their wealth differently than younger people. Individuals over age 60 make up a third of all cruise ship bookings, for example, and 47% of all recreational vehicle (RV) users are over 55 years old, creating a potential opportunity for providers of these services and products. The potential benefit for makers of motorcycles might be another area for investor attention. In the UK for example, nearly two thirds of motorcycle driving licenses are held by those over age 55.  To be sure, how these trends play out will depend partly on how society responds to the challenges. Goldman Sachs Research points out that governments and companies may react by, among other things, seeking to increase labor force participation by women, promoting education and skills development for those of working age, and increasing immigration. Automation, humanoid robots, and artificial intelligence could also be an opportunity, as companies look for ways to cope with labor shortages.

   S&P 500 annual returns have exceeded 20% over the past two years, continuing their long run of outperformance since the trough of the global financial crisis (GFC). Inevitably, investors may now wonder: Is it time to trim back exposure to US equities? Goldman Sachs’ Wealth Management Investment Strategy Group (ISG) says the answer is a “resounding no.” ISG has recommended overweighting US stocks since the trough of the GFC, based on the group’s investment theme of “US Preeminence.” This view is underpinned by the fact that the US enjoys economic and structural advantages — such as higher productivity, top ranked education institutions and innovation, and dynamic capital markets — that make it the most attractive place to invest. Over this 15-year period, ISG has also recommended clients stay invested in US equities. Clients who followed this advice were positioned for strong performance: US equities have outperformed non-US developed markets by 8 percentage points on an annualized basis and emerging market equities by 9 percentage points since the trough of the GFC. In their 2025 Outlook — Keep on Truckin’ — ISG reiterates that its “US Preeminence” and “Stay Invested” themes remain intact.     That said, ISG doesn’t expect US equities to meaningfully outperform non-US equities over the next five years — and most definitely not by the magnitude seen over the last 15 years. ISG’s base case is for the S&P 500 index to deliver an 8% return in 2025 and 5% annualized over the next 5 years. ISG’s forecasts may differ from those of other groups at Goldman Sachs. Why investor portfolios should be overweight US assets ISG’s view of “US Preeminence” is predicated on several factors that have helped create the largest and most diverse, innovative, and resilient economy in the world. Some of the factors are economic, like the size of the economy and the country’s wealth, and some are structural, like good governance and a system of checks and balances. The US has been the world’s largest economy since the 1890s and will remain so for the foreseeable future, “as the gap between the US and the rest of the world continues to widen — just as it did in 2024,” says Sharmin Mossavar-Rahmani, head of ISG and chief investment officer of Wealth Management. Last year, the US added $1.4 trillion to its GDP, whereas China added $937 billion, and the entire euro zone added $619 billion. The increase in US GDP per capita in 2024 dwarfed those of other countries, while US labor productivity surged. The economic wealth of the US and its continued growth is significant as it allows for a much greater allocation of resources to research and development (R&D), innovation, healthcare, education, the military, and other areas. In addition, it also affords the country its unique status as the issuer of the world’s reserve currency.  This unique combination of economic, cultural, and structural factors — and the widening of the gap between the US and other countries across most of these metrics for the foreseeable future — underlines ISG’s strategic overweight to US assets. Why investors should stay invested in US equities The 2025 Outlook highlights several reasons why investors should favor US stocks over shifting to other allocations: Non-US equities: While non-US developed market equities are trading at a historic discount of 54% to US equities, and emerging market equities are at an even deeper discount, ISG believes the lower valuations are justified. “While we acknowledge that US equities are expensive, we also show that high valuations alone are not an effective market-timing signal, and that the record cheapness of most non-US equity markets is warranted by their inferior corporate fundamentals and structural economic weaknesses,” says Brett Nelson, head of tactical asset allocation for ISG. Bonds and cash: ISG expects US equities to outperform both intermediate-duration US bonds and cash in 2025, based on its economic growth forecast of 2.3%. Gold and bitcoin: Despite the 27% increase in the spot price of gold and the 123% increase in the price of bitcoin in 2024, ISG doesn’t believe that either gold or bitcoin have a strategic role in clients’ portfolios. Gold doesn’t generate income, and — contrary to popular belief — it’s not an inflation hedge. Bitcoin doesn’t meet ISG’s criteria of an investable asset. For example, it doesn’t dampen volatility, provide consistent and reliable diversification benefits to a portfolio, generate steady reliable cash flow on a contractual basis (like bonds), nor does it generate earnings through exposure to economic growth (like equities). Pullbacks of 5-10% reflect normal equity volatility ISG’s recommendation to stay invested doesn’t preclude occasional market pullbacks which can happen at any time. Pullbacks of approximately 5-10% represent normal equity volatility and aren’t a compelling reason to underweight stocks. In fact, there’s an 80% probability that the S&P 500 pulls back 10% from its high during a one-year period when valuations are elevated. 

   Financial markets have whipsawed amid tariff negotiations between the US and its major trade partners. If the US implements sustained taxes on exports similar to those that have recently been proposed, it would likely cut S&P 500 Index earnings per share by 2-3%, according to Goldman Sachs Research. Beyond the additional 10% tariff on imports from China, the Trump administration has proposed, and since delayed, a 25% tariff on imported goods from Mexico and Canada. Tariffs on the EU have also been suggested. It remains to be seen whether the US will implement substantial export taxes or reach a compromise with its trade partners. Our economists’ baseline tariff forecast (which includes taxes on Chinese exports, but not Mexico and Canada) estimates that the effective US tariff rate could rise by about 4.7 percentage points. If tariffs on Canada and Mexico are implemented, that would raise the effective tariff rate by an additional 5.8 percentage points. How will tariffs impact the S&P 500? For the stock market, every five-percentage-point increase in the US tariff rate is estimated to reduce S&P 500 earnings per share by roughly 1-2%, writes David Kostin, chief US equity strategist at Goldman Sachs Research, in the team’s report. As a result, if sustained, the US tariffs that were recently considered — a 25% tariff on imported goods from Mexico and Canada (energy imports from Canada will be subject to an incremental 10% tariff) and an incremental 10% tariff on imports from China — would reduce Goldman Sachs Research’s S&P 500 EPS forecasts by roughly 2-3%. “If company managements decide to absorb the higher input costs, then profit margins would be squeezed,” Kostin writes. “If companies pass along the higher costs to end customers, then sales volumes may suffer. Firms may try to push back on their suppliers and ask them to absorb part of the cost of the tariff through lower prices.” Tariffs could also potentially drive up the value of the dollar, according to Goldman Sachs Research foreign exchange analysts. A stronger dollar could further weigh on the earnings of S&P 500 companies, which derive 28% of revenues outside the US (although they report less than 1% of revenues explicitly from each of Mexico and Canada). For example, Goldman Sachs Research’s earnings model suggests that, holding all else equal, a 10% increase in the value of the trade-weighted dollar would reduce S&P 500 EPS by roughly 2%. During Trump’s last presidency, the S&P 500 fell by a cumulative total of 5% on days when the US announced tariffs in 2018 and 2019, according to Goldman Sachs Research. It fell by slightly more, a total of 7%, on days when other countries announced retaliatory tariffs. The impact of policy uncertainty on US stocks As well as potentially hitting earnings, tariffs could impact US stocks by causing greater uncertainty. The US Economic Policy Uncertainty Index — based on newspaper coverage, reports from the Congressional Budget Office, and a survey of economic forecasters — has gyrated significantly amid trade uncertainty. Shortly before the announcement of the latest tariffs, the measure jumped to a top percentile reading relative to the last 40 years. All else being equal, Kostin writes, the historical relationship between policy uncertainty and the premium that investors demand from S&P 500 companies in return for holding their stock in times of elevated risk suggests that the recent uncertainty increase will weigh on the value of US stocks. It could reduce the forward 12-month price-to-earnings multiple (a key measurement for a stock’s market value) by around 3%. Kostin also notes that some investors are concerned that tariffs could lead to higher interest rates. High bond yields could weigh on equity valuations, as increasing bond yields make stocks look less attractive. Indeed, the risk of tariffs driving up inflation could cause a short-term increase in yields, particularly on shorter-maturity bonds, according to economists in Goldman Sachs Research. However, they expect that, ultimately, the potential impact of a trade conflict on economic growth would prevent a major increase in long-term yields. Taken together, the models for earnings-per-share and valuations indicate the fair value of the S&P 500 could decline 5% in near term, should sustained US tariffs like those recently discussed take place. A more short-term implementation of tariffs would result in a smaller impact on equity markets.

   The S&P 500 may offer a good opportunity for active stock pickers, as company-specific factors take precedence over macro trends in driving returns. The opportunity for active investing comes as Goldman Sachs Research predicts the S&P 500 Index will climb some 6% this year. S&P 500 return dispersion last year registered one of the highest levels on record, meaning there was a considerable gap between the best and worst performers in the index. High single-stock volatility and low correlation within the index also point towards a favorable backdrop for stock pickers, according to David Kostin, chief US equity strategist at Goldman Sachs Research.    Is this a good time to buy single stocks? There are a number of reasons why there could be opportunities for investors who target specific companies rather than investing in broad indexes. Last year\’s S&P 500 dispersion reading of 70 percentage points was the highest since 2007 (outside of recessions). Six out of 11 sectors in the S&P 500 registered above-average return dispersion — the highest being Information Technology at 106 percentage points, while Real Estate was the lowest at 39 percentage points. The jump in dispersion was accompanied by increasing certainty surrounding the economic outlook and the growing importance of debates about themes such as artificial intelligence and the US election, according to Goldman Sachs Research. Another indicator of the high dispersion in the S&P 500 in 2024 is the elevated level of single-stock volatility compared to volatility of the broader index. Over the past three months, the average S&P 500 stock has exhibited 1.7% volatility — more than twice the level of the aggregate index, at 0.8%. An analysis of implied volatility (the market’s expectation for future volatility) on three-month S&P 500 options contracts suggests traders are positioned for this dynamic to continue. In addition to the high level of return dispersion last year, stock correlation within the S&P 500 — a measure of how consistent the movements of stocks are in relation to one another — was near historic lows. This combination of high return dispersion and low stock correlations reflects a market where returns are driven by micro, rather than macro, factors, Kostin writes in the team’s report. Goldman Sachs Research forecasts the S&P 500 Index will rise to 6500 in 2025 (as of February 13). “In a micro-driven market, a high share of the typical stock’s return is explained by company-specific factors, while a macro-driven market means the returns for the typical stock are primarily explained by factors such as beta, sector, size, and valuation,” Kostin writes. Beta measures the volatility of an equity relative to the overall market. Is the less predictable environment here to stay? Recently, 74% of the typical S&P 500 stock’s returns have been driven by fundamental factors rather than macro factors, a significant increase on the average of 58% over the past two decades. Goldman Sachs Research expects this micro-driven environment to persist in 2025, for three reasons: “First, GS economic forecasts point to a healthy growth environment this year. Second, continued AI development and adoption should create differentiation across stocks. Third, elevated policy uncertainty also suggests elevated dispersion,” Kostin writes. The Economic Policy Uncertainty Index — based on newspaper coverage, reports from the Congressional Budget Office, and a survey of economic forecasters — has spiked amid tariff announcements by President Trump and his administration. The index hit 496 at the end of January, one of the highest levels since the Covid pandemic. “Looking ahead, debates over trade, tax, fiscal, and other policies represent potential catalysts for additional return dispersion,” Kostin writes. Which sectors are best for stock pickers? Sectors with high dispersion are attractive for stock pickers: Goldman Sachs Research’s dispersion framework ranks Consumer Discretionary as the sector with the highest dispersion, followed by Information Technology, and Communication Services. More macro-driven sectors such as Real Estate and Utilities have the lowest dispersion scores, indicating less opportunity for stock pickers.  

    The price of gold has surged more than 40% since the start of January 2024, repeatedly shattering records. Goldman Sachs Research forecasts the rally in gold will continue amid demand from central banks. The price of the precious metal is predicted to climb a further 8% to $3,100 a troy ounce by the end of 2025, analyst Lina Thomas writes in the team’s report. (The team’s previous projection was for gold to rise to $2,890.)   The increased forecast is underpinned by higher-than-expected demand for gold from central banks, which have been increasing their reserves of the commodity since the freezing of Russian central bank assets in 2022, following Russia’s invasion of Ukraine. As well as stronger central bank demand, Goldman Sachs Research anticipates a boost to the gold price from increased purchases of gold ETFs as declining interest rates make gold a more attractive investment. Those factors may be somewhat offset by speculators reducing their net long positions on gold in futures markets, which is projected by Goldman Sachs Research to weigh on the gold price somewhat. Net long positions are currently very high as concerns of sustained tariffs from the Trump administration drive investors towards safe haven assets including gold. But continued uncertainty — whether it’s about tariffs, geopolitical risk, or fears about high government borrowing — could also push speculators to increase their long positions in gold. This scenario would drive the gold price as high as $3,300 per troy ounce by the end of 2025, Thomas writes in the report. Our analysts’ gold price prediction The main driver of the higher forecast is central bank buying, which exceeded expectations in December. Before the freezing of Russian central bank assets in 2022, the average monthly institutional demand on the London over-the-counter gold market stood at 17 tonnes. In December last year, that figure hit 108 tonnes. Thomas estimates that demand from central banks alone on the London OTC gold market increased fivefold following the freezing of Russian central bank assets. As a result, she says, the team has increased the assumption for central bank demand in its gold price forecast. Consistently higher demand from central banks could raise the gold price by as much as 9%, Thomas adds. Goldman Sachs economists also expect the Federal Reserve to cut interest rates twice this year, which should provide an additional lift to the gold price as non-interest-bearing assets start to look more attractive relative to bonds. These two dynamics should outweigh the anticipated drag on the gold price from speculators offloading their unusually high net long positions in the yellow metal on futures markets. Speculators’ net long positions are high because of demand for gold as a safe haven asset — a phenomenon that could be short lived if markets become more certain about the economic and political environment. A return to more normal levels of long positions among speculators could weigh on the gold price in the short term — which could make it a less attractive time for investors to enter the market — but the price is still likely to trend upwards by the end of the year, according to the report. What are the risks to the new price forecast? Several factors could cause the gold price to either undershoot or exceed Goldman Sachs Research’s projection for gold to rise to $3,100 per troy ounce by the end of year. On balance, these risks are to the upside — they are more likely to drive the price higher than forecast. For example, if policy uncertainty remains elevated or sustained concerns about tariffs continue to drive demand for safe haven assets, the team predicts that speculative gold investing could push prices as high as $3,300 by December 2025. “We also see upside risk to our gold price forecast from stronger-than-expected central bank demand on higher US policy uncertainty,” Thomas writes. If purchasing by central banks hits 70 tonnes per month on average, gold prices could climb as high as $3,200 by the end of 2025, she adds. Similarly, an increase in concerns over the trajectory of US government debt could drive central banks with large US Treasury reserves to buy more gold, as well as driving speculative positioning and ETF flows higher, which could provide an additional 5% rise in prices by the end of the year, bringing them to $3,250. Gold prices could fall short of the new forecast if the Fed cuts US interest rates less than our analysts expect. For example, if the Fed keeps rates flat, the team expects the gold price to reach only $3,060 per troy ounce by the end of 2025.