In a significant shift in its investment stance, Goldman Sachs has elevated its rating on global equities from “neutral” to “overweight”, citing the positive outlook on economic expansion and a revival in manufacturing activities as key drivers behind the decision. This adjustment comes after the firm maintained a neutral perspective across various asset classes at the onset of the year.
Manufacturing Activity Shows Signs of Recovery
Recent analyses have revealed encouraging signs of recovery in the global manufacturing sector, including notable improvements within the United States. These developments have prompted market participants to keenly observe upcoming economic indicators, which will play a crucial role in shaping the direction of interest rate adjustments by major central banks.
Goldman Sachs, in its note dated February 16, expressed optimism about economic growth emerging as a pivotal factor influencing market dynamics. The firm anticipates that the correlation between equities and bonds will adopt a more negative trajectory throughout the year, suggesting a divergence in their performance.
The Impact of Monetary Policy on Risk Assets
The brokerage highlighted the historical backdrop where easing monetary policies have generally favored risky assets. However, the current year might witness a deviation from this trend, as the anticipation of rate reductions has already been factored into market valuations, potentially diminishing the impact of any actual policy adjustments.
The probability of the US Federal Reserve implementing a 25 basis point rate cut in June stands at approximately 51.3%, as indicated by the CME FedWatch tool. This scenario underscores the market’s ongoing speculation and its implications for investment strategies.
Global Earnings Growth Under the Microscope
Despite the potential for global economic expansion, Goldman Sachs projects a relatively subdued outlook for earnings growth across the globe. The firm attributes this to declining revenue growth and limited opportunities for enhancing profit margins. Nonetheless, the prospect of economic growth introduces potential upside risks to earnings projections, offering a silver lining amidst the challenges.
Navigating the Bond Yield Environment
The brokerage also issued a caution regarding the relationship between bond yields and equity markets. While equities have so far managed to absorb the impact of rising bond yields amidst improved growth prospects, there exists a looming risk of reverting to a “good news is bad news” scenario. This situation could arise if positive economic indicators lead to higher yields, thereby exerting pressure on equity valuations.
Strategic Adjustments in Asset Allocation
In addition to its optimistic stance on equities, Goldman Sachs adjusted its view on global credit assets, downgrading them to “underweight” from a previously “neutral” rating. The firm justifies this move by pointing to the tight credit spreads, which could limit the potential returns from these assets.
Furthermore, Goldman maintained its “neutral” rating on longer-dated global bonds and commodities, reflecting a balanced approach to these asset classes amidst the current economic landscape.
Goldman Sachs’ recent adjustment in its global equities rating to “overweight” underscores a positive outlook on economic growth and the recovery in manufacturing activities. While the potential for earnings growth remains cautious, the broader economic expansion presents opportunities for investors to navigate the evolving market dynamics effectively. As the financial landscape continues to adjust to incoming economic data and central bank policies, strategic asset allocation will be paramount in maximizing returns and mitigating risks.
Featured image credit: Michael M. Santiago via Getty Images