Goldman Sachs has expressed optimism about risk asset returns over the next year, citing a favorable environment for assets benefiting from economic recovery and rising inflation. The investment bank suggests investors should increase exposure to stocks and credit in the short term.
Since early September, global market sentiment has improved significantly, with U.S. non-farm payrolls surpassing expectations and the People's Bank of China implementing significant measures. These developments have contributed to a clearer global economic outlook, previously leading to rallies in China and Western stock markets.
However, recent inflation data and rebounding oil prices have shifted the market focus back to inflation concerns. Goldman Sachs' latest report indicates a transition in market narrative from a stable growth environment to a "reflation" scenario. Analyst Andrea Ferrario noted that while optimistic sentiment prevailed in September, driven by growth repricing, indicators have since shifted toward reflation expectations.
Goldman Sachs expects markets to oscillate between stable growth and reflation environments until the end of the year. The bank has upgraded its stock and credit ratings from neutral to overweight for the next three months, highlighting potential gains from economic growth repricing.
The report also underscores that growth expectations have become a more significant driver of cross-asset returns. Earlier in the year, negative economic news was seen as a catalyst for Federal Reserve rate cuts, but by summer, the market's reaction shifted to a more direct interpretation of bad news. Recently, positive economic data is seen as beneficial for growth pricing but less clear for policy pricing, as recession risks appear reduced, and inflation worries resurface.
Goldman Sachs believes stocks and credit are more appealing in the current reflation environment, as opposed to the earlier preference for stable, low-risk assets. Over the past two months, cyclical stocks in Europe and Japan have outperformed defensive stocks, with U.S. cyclical stocks showing stronger gains recently. Assets influenced by China's economy, such as Chinese stocks and copper, have also demonstrated robust returns.
The bank remains optimistic about risk asset returns over the coming year, despite potential market volatility, and advises selective hedging strategies. Although in a late-stage economic cycle, which often signals growth deceleration, Goldman Sachs trusts that stock markets can still achieve strong returns through earnings growth, valuation enhancements, and structural growth opportunities. In contrast, credit assets may offer more limited returns.
