Goldman Sachs Asset Management believes that the U.S. stock market may have limited upside potential in the current macroeconomic environment. Despite the Federal Reserve’s aggressive tightening of monetary policy in recent years, the U.S. economy has remained resilient and has defied expectations of a recession in 2023. However, GSAM warns that if a recession were to occur, it would likely happen this year due to the lag in the effects of monetary policy on the real economy. The Fed has held interest rates steady in its March meeting, but markets are anticipating a rate cut in June as inflation falls and the economy slows.
James Ashley, head of international market strategy at GSAM, believes that any weakness in the stock market could be beneficial as it would give the Fed room to cut rates in response to disinflationary pressures. While GSAM sees U.S. equities as fairly valued, they believe there is limited upside potential at current valuations, suggesting that better opportunities may be found in other markets. Specifically, GSAM sees India as a strategic long-term growth story, with the potential for double-digit nominal GDP growth in the future. Despite the recent rally in Indian markets, GSAM believes there is still significant upside based on the country’s growth story.
Unlike central banks in other major economies, the Bank of Japan recently hiked interest rates for the first time in 17 years, marking a significant shift from its previous negative interest rate policy. This move suggests that Japanese stocks have more room to run, according to Ashley. He noted that Japan is unique in that inflation is not a problem for its economy but rather a solution to a long-standing issue. Japanese firms now have more pricing power, which could benefit equity investors. GSAM considers Japan as the most attractive market in both the short-term and long-term, with further upside potential.
Overall, GSAM believes that U.S. equities may be fairly valued with limited upside potential, and investors should look for better opportunities in other markets. India is seen as a promising growth story with the potential for significant upside, particularly in small and mid-cap stocks. Japan, on the other hand, has the most attractive equity market potential, given its recent interest rate hike and the newfound focus on embracing inflationary pressures. Despite uncertainties in the global economy, GSAM remains optimistic about the investment opportunities in these emerging and developed markets.
