Goldman Sachs strategists note a significant shift toward reflation in assets, driven by strong macroeconomic data and election outcomes. This change marks one of the largest monthly reflation trends since 2000. The strategy involves observing assets linked to global economic growth and monetary policy changes. The company’s reflation stock basket has risen by about 7% since late September, featuring notable stocks like Emcor (EME, Financial), Uber Technologies (UBER), and United Rentals (URI).
Lead strategist Andrea Ferrario and his team suggest that during the past two decades of reflation periods, replacing the bond portion of a traditional 60/40 portfolio (60% stocks and 40% bonds) with alternatives has been rewarding. They highlight a chart showing what has worked — particularly the success of trend-followers — and currently advocate for investments in gold and European bonds. Gold serves as a geopolitical risk hedge, benefiting from Federal Reserve rate cuts and emerging market central bank purchases, while European bonds are supported by macroeconomic divergence and potential trade tariffs that may widen the yield gap between U.S. and German bonds.
Since early October, the yield gap between 10-year U.S. Treasuries and German government bonds has expanded by about 30 basis points. Gold prices have retreated from historic highs since the presidential election victory of former President Donald Trump. Regarding equities, Goldman Sachs asserts that as long as rising U.S. Treasury yields are driven by positive economic growth, U.S. stocks should withstand increasing bond yields. However, if real yields rise relative to real GDP growth expectations, or if bond yields climb too rapidly, these rising yields could eventually constrain stocks.
The S&P 500 index recently approached 6000 points, posting a 4.7% increase and achieving its best weekly gain in a year.
