- Goldman Sachs is predicting a "flattish market" for the rest of 2024.
- Rate cuts, inflation, and geopolitical risks are all injecting uncertainty into the market.
- Below are five trades to actively diversify your portfolio and hedge risks.
Don't expect the mammoth returns of the S&P 500 to continue this year, according to Goldman Sachs Asset Management's midyear investment outlook released last week.
"What do we expect for the rest of the year? Essentially a flattish market," said Alexis Deladerrière, the head of international developed markets equity. "Our view is that the full-year market return has been achieved in the first half."
One reason is that the market's gains have been disproportionately concentrated. The S&P 500 is up 18% this year, but six stocks — Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Meta (META), and Alphabet (GOOG) — are responsible for almost two-thirds of the index's total return, indicating that market gains have been driven by a select few mega-caps riding the AI wave.
Deladerrière also predicts that the monster earnings growth of the first half of 2024 will decelerate in the next six months.
But this doesn't mean that Goldman Sachs is expecting a severe downturn. "It's absolutely a soft landing," Lindsay Rosner, global head of multi-asset fixed income, said. "We are seeing pretty close to trend growth." Rosner expects GDP to grow by up to 2% in the next six months.
However, the exact path to recovery is still opaque. More economic data on inflation and the job market is needed, and the looming US election is injecting further uncertainty into the economy. Recent elections in Mexico, the UK, and France have rippled across markets. The bank also sees the ongoing conflicts in the Middle East and Ukraine as significant risks.
All of these uncertainties mean that investors need to be proactive about their portfolios. Active management is more important now than ever, and Goldman Sachs recommends taking steps now to prepare for a lukewarm second half of 2024.
5 ways to invest in the face of uncertainty
With analysts predicting the first Fed rate cut in September of this year, Goldman Sachs recommends that investors increase their allocations to fixed income.
"As soon as the Fed starts cutting," Rosner said, "that rate that you have been receiving in your cash surrogate, your money market fund, your T bill — and $6 trillion is sitting there earning that — that's going to evaporate."
Investors should prepare for a steepening of the yield curve in the next few months and quarters and adjust their portfolios accordingly, the bank said. It recommends considering yielding securities such as investment grade or even high-yield bond funds in industrials and energy. Defensive investments, such as government bonds and safe-haven currencies like the US dollar, can provide insurance in an uncertain economic backdrop.
The bank also sees an opportunity in small-cap stocks, which can add diversity to megacap-heavy portfolios. Deladerrière expects the market to broaden in the second half of 2024, creating an environment for small-caps to rebound after the last few years of underperformance. Historically, US small-caps have performed well in election years. Additionally, fixed income isn't the only investment that will be impacted by Fed rate cuts. Small-cap companies typically carry more debt on their balance sheets than their larger counterparts, so a rate cut would provide a bigger boost by reducing interest expenses.
To address geopolitical instability and financial shocks, Goldman Sachs recommends hedging risk through commodities. Oil is a useful hedge against geopolitical supply chain disruptions and has been popular this year, the bank said. Investors are also turning toward gold, a tried-and-true store of value. The metal has been in high demand this year, with its price hitting a record in May.
The bank also points out a few areas of the economy that it believes to be well-positioned for growth — and it's not just AI-related areas that have been getting all the buzz so far. Although AI is still an important trend, Deladerrière said the bank's view is that it's "a little hyped." He points to issues such as climate change and an aging global population, which he believes will spur the clean energy and healthcare sectors.
Typically, the best companies in these sectors are based in the US. "The US has a more resilient macro, more innovation, more resources, and companies that tend to have higher margins, higher returns, lower debt," remarked Deladerrière.
But that doesn't mean investors should rule out international equities. Goldman Sachs is seeing increasing opportunities in Asia. Japan is one example. Corporate governance reforms in recent years have made the country's markets a more attractive place to invest as companies improve the quality of their earnings. Japan is well exposed to AI, clean energy, and healthcare trends.
The bank also highlights opportunities in India. Deladerrière sees massive potential for the technology sector in the country: "It has some of the world's most advanced tech companies. For example, it has fully digitized its identity system already." Overall, the bank believes being proactive and creating diversified portfolios is key in uncertain environments.
By investing in a variety of asset classes with different return drivers, investors can protect themselves against economic shocks as well as unlock new opportunities for gains, it said
"Don't put all of your eggs in the same basket," Deladerrière said. "What has worked in the past six months or 18 months may not be what works in the next 18 months."
