Goldman Sachs: 17 Speculations on the Global Market in 2024

After two years of interest rate storms, the market finally received a signal of the Federal Reserve's shift at the end of 2023, and the resilience of the U.S. economy has also been stronger than expected. As we enter 2024, interest rate hikes may no longer be the biggest threat to the market, but risks still exist.

In a recent article published by Tony Pasquariello, Head of Hedge Fund Sales at Goldman Sachs, he pointed out that "from a fundamental perspective, the situation is relatively friendly, but from a technical perspective such as market sentiment, positions, and risk premiums, the situation is more severe."

Pasquariello believes that in 2024, the U.S. stock market will fluctuate within a wider range, with significant industry differentiation, and will not see the strong upward trend of the past four years. "Large-cap tech stocks may experience a short-term correction, but they are still expected to outperform in the long run."

"Goldman Sachs' model shows that if the Federal Reserve cuts interest rates 5 times in 2024, the yield on 10-year U.S. Treasury bonds will fall to around 1.7% by the end of the year, and the S&P 500 index is expected to rise to 5,100 points within the year."

As for other markets, Goldman Sachs believes that "some emerging markets are expected to outperform the global market in 2024, and the Japanese stock market still has room for growth, but the momentum may not be as strong as the first half of last year, and the Bank of Japan is unlikely to abandon its negative interest rate policy in the first half of this year."

He also pointed out that "the biggest risk facing the global market in 2024 is fiscal issues," as countries may need to raise funds through issuing bonds if they implement loose fiscal policies. In the United States, there is a need to issue a net amount of $2.4 trillion in U.S. bonds, and there were concerns in the past few months that there may not be enough demand to absorb so many long-term bonds.

Here are Pasquariello's 17 thoughts on the global market in 2024:

1. Did the year-end surge in the U.S. stock market come from January?

After 9 consecutive weeks of gains (one of the sharpest short-term gains in modern history), the market is severely overbought, and a correction is likely to occur.

Although the market is usually strong at the beginning of January, "so far, the correction is still the main theme." I would not be surprised if the stock market continues to experience a slight decline in January.

2. What is the current position?

One way to measure positions is to range them from -10 to +10. Based on this measure, I estimate that traders' positions were around -8 at the end of October. By the end of December, this number had risen to +8. Although this is a subjective judgment, it is based on Goldman Sachs' internal analysis of institutional activity, clearing data, and personal experience.

While this is likely to be inaccurate, I can confidently say that "it is difficult to see how professional investors can continue to exert the strong firepower seen in November and December in January." In addition, the market is currently in the most severe period of stock repurchase restrictions before the release of the fourth quarter earnings report. One positive piece of information is that January is usually the month with the highest demand for US retail investors throughout the year.

3. From a macro perspective, will the US stock market enter a bull market in 2024?

In order for the US stock market to enter a bull market in 2024, either the price-to-earnings ratio needs to be higher than 19 times, or the consensus expectation for earnings per share needs to be higher than $244, or both.

You might say that we saw an epic level of monetary easing at the end of 2023, which laid a very favorable foundation for future growth in 2024. Here, you can further point out that historically, there have only been three times when the monetary environment has been so loose, namely June 2003, May 2009, and May 2020, and after each of these times, the market has achieved exceptionally strong returns.

Although I cannot argue that those periods will be repeated, I still believe that the market will experience range-bound volatility at that time. Let's see how Ben Snider (Senior Strategist at Goldman Sachs) arrived at a target of 5,100 points for the S&P 500 index:

...By the end of this year, analysts will downwardly revise their consensus expectations for earnings per share for the S&P 500 index in 2025 from the current $275 to $263. Our top-down forecast is currently $250, and the consensus forecast is halfway to that forecast, consistent with the historical pattern of analysts' downward revisions.

Goldman Sachs' Economic Research Department expects the Federal Reserve to cut interest rates five times in 2024, and the yield on 10-year US Treasury bonds will fall to around 1.7% by the end of the year.

According to our model, this will support a fair price-to-earnings ratio of 19-20 times. A price-to-earnings ratio of 19.5 times multiplied by earnings per share of $263 is approximately equal to 5,100 points.

This corresponds to an expected total return of 8%, including dividends, which is lower than the median of 11% in the first year of the Fed's rate-cutting cycle and the median of 11% in presidential election years over the past 40 years.

Currently, we expect that the upside risk is mainly due to the recent monetary easing, which may boost corporate profits more than expected.

4. Has it become a consensus that US large-cap tech stocks have peaked?

Capital has been pouring into US tech stocks for a long time, which has led us to face a group of stocks with high capital concentration and very high valuations. As we have seen in recent years, this may result in a period of poor performance for tech stocks.

In addition, the law of large numbers has raised doubts in the industry about the continued significant growth in the market value of these companies. However, if you take a higher perspective, I believe that these companies have the highest quality balance sheets on Earth... They are creating and returning a large amount of capital, and they are most directly benefiting from the hottest and most influential new themes. And, the strong performance of these stocks is a reasonable reflection of their excellent earnings growth. Finally, don't forget that FANG stocks have been in consensus allocation for years, but that hasn't hindered their outstanding performance.

My conclusion is: these stocks are not cheap now and are widely held, so careful selection is needed when adding to positions at current prices; but in the longer term, I tend to buy during major corrections.

5. Based on this, will the US stock market (upward trend) expand?

By the end of 2023, many people suddenly seem to agree with the idea that "weak" stocks will take the lead.

Here is an observation: considering positions and seasonal factors, is it reasonable for sectors such as small-cap stocks to perform well? Yes. Is this a more favorable environment for assets that have been hit hard by the Federal Reserve's liquidity drain? Yes.

Should we expect the performance of the "Big Seven" to once again outperform by six times this year? No. However, I don't want to give up on technology stocks, and for me, the rebound of truly low-quality stocks is also difficult to sustain for more than one or two quarters.

6. How much impact will artificial intelligence have in the market?

If the mid-2023 marks the rise of generative artificial intelligence, then by the end of the year, market attention will diminish.

I say this based on Google search trend data, mentions of artificial intelligence in corporate earnings conference calls, and the market itself.

Considering the in-depth research we have done on this topic, I believe it is a structural development with a long way to go. More specifically, borrowing a phrase from a client, 2024 will mark the transition of "applying artificial intelligence to improve artificial intelligence technology."

7. Shouldn't we go against the Federal Reserve?

This is the first principle, especially when the Federal Reserve is in control. Therefore, if Goldman Sachs' statement is correct, that the Federal Reserve will cut interest rates five times in 2024 (followed by three more cuts in 2025), because inflation is declining in the case of robust GDP growth, this undoubtedly benefits the bulls. However, this factor is clearly not being ignored by the stock market at the moment.

My view of the overall market is: don't go against it, but don't blindly follow it either. Similarly, I tend to believe that the market will be supported by the friendly interaction between the Federal Reserve and economic growth, but will be limited by high positions and high valuations. Similarly, I can easily see a situation where the market experiences wide fluctuations with frequent rotations and significant sector divergence.

8. Has US inflation always been temporary?

No. Because the United States has experienced above-trend inflation for many years, core inflation remains well above target, and households have borne a huge burden (leading to the fundamental effects that still exist today).

Nevertheless, as the Federal Reserve continues to make progress, the idea that inflation will remain structurally high for a long period of time seems increasingly unlikely. 9. Are American consumers ready to increase spending?

No. I am always surprised by the pessimistic sentiment of consumers, especially during earnings season.

Although I understand some concerns, the data shows that the situation is good, with many companies reporting better performance in November and December than in October.

The bigger issue is that the US unemployment rate is 3.7%, with 2.7 million new jobs added last year and wage growth outpacing other inflation indicators, leading to an increase in disposable income for households. Therefore, while some areas may still face pressure, I believe that overall, American consumers are in good shape given the dynamics of the labor market.

10. What are the macro drivers of market volatility? Will trading volume increase or decrease this year?

John Marshall and I share the same view.

The first factor we are concerned about is the impact of economic growth on stock market volatility. Analysts' consensus forecast is that volatility will increase as slowing growth and rising unemployment are correlated with increased volatility. However, according to Goldman Sachs' more optimistic forecast, it is entirely reasonable for stock market volatility to remain at its current low level.

The second key factor is investment flows. The more investors sell volatility, the more hedging flows market makers will have, which will exert downward pressure on realized volatility. This impact can be seen from the extremely low realized volatility in 2017.

We expect option selling strategies to be popular in 2024, leading to realized volatility lower than levels estimated solely based on macro growth. Combining these two factors, our model indicates that volatility will remain stable or even decrease in 2024.

11. Can emerging markets outperform the global market in 2024?

My colleague, Caesar Maasry, believes that in 2024, the performance of some emerging markets can surpass that of some developed markets, and some emerging markets may even outperform Europe. This is mainly due to the accelerated economic growth of some regional emerging economies (such as South Korea, Taiwan, South Africa, Thailand, Chile, and Poland) and the enhancement of earnings growth expectations.

13. Will the theme of "deglobalization" continue?

To some extent, yes, "deglobalization" may continue for quite some time.

14. Will the Bank of Japan adjust its negative interest rate policy?

It is unlikely that the Bank of Japan will abandon its negative interest rate policy in the first half of 2024. Market expectations for the Bank of Japan to exit the negative interest rate policy or raise policy rates faster are higher than Goldman Sachs' expectations. Market participants seem to anticipate the first rate hike in the first or second quarter. We are still paying attention to two key factors:

1. The pace of wage growth, and we believe the Bank of Japan wants to see confirmation of this in the results of collective labor-management negotiations in spring 2024.
2. The impact of wage growth on service prices is seen by Ueda and Oto as necessary evidence of sustainable inflation. Although wage increases may see further recovery in the spring, we still expect that service sector inflation will take several more months to reach the Bank of Japan's target.

15. Can the Japanese stock market continue to rise?

I believe so, although the increase may be smaller than in the first half of 2023. Last year, I was bullish on the Japanese stock market mainly for three reasons:

1. Continued improvement in shareholder treatment and returns;

2. Inflow of foreign capital into the Japanese stock market;

3. Most importantly, a paradigm shift that helped Japan escape the deflation trap that lasted for thirty years.

I believe all of these factors still overall favor the bulls, although the market has already achieved some results and the next phase of the game will be more challenging. Ultimately, we expect the TOPIX index to rise to 2,650 points by the end of the year, with earnings growth of 8% per share.

16. What is the biggest global risk this year?

There are many geopolitical hotspots worth continuous attention this year, such as the upcoming presidential elections in many countries, especially the United States, so the "headline roulette" style of risk will only increase in 2024.

However, if I have to choose one market risk, it would be fiscal issues, as countries need to raise funds through debt issuance to implement loose fiscal policies. In the United States, there is a need to issue a net amount of $2.4 trillion in Treasury bonds; there were concerns in the past few months that there might not be enough demand to absorb so many long-term bonds.

In addition, the current federal debt in the United States stands at $34 trillion (increased by $1 trillion in just the past three months); as this number may continue to rise, will the market reexamine the issue of debt sustainability as the elections approach?

17. Will the structural bull market in commodities correct?

Commodities rebounded from the bottom in late 2020, peaked in mid-2022, and then experienced a pullback. Although index returns have obscured some excellent stories in commodities (such as gold reaching a historic high at the end of last December), in fact, many people have lost track of their overall trend since commodities reached their highs. Here is Daan Struyven's (Goldman Sachs analyst) outlook for the future:

Rising geopolitical uncertainty increases the hedging value of commodities. The rise of artificial intelligence may increase the demand for electricity and green metals, but it may also increase the supply of traditional commodities (such as through higher oil recovery rates). The impact of decarbonization on commodity demand is mixed.

We expect that due to the improvement in the cyclical background, commodity prices will rise, there will be structural shortages in green metals and refined oil supply, and commodities will have significant hedging value against potential negative geopolitical supply shocks.

The commercial crude oil inventory levels of the Organization for Economic Cooperation and Development (OECD), which is the preferred indicator for measuring supply tightness, are close to their historical average levels. However, due to OPEC production cuts and the rapid growth of US shale oil supply, the remaining production capacity is as high as nearly 6% of global demand. Although this surplus capacity effectively delays the occurrence of a supercycle in the oil market, it does not necessarily prevent it from happening, as long-term supply-driven factors such as oil reserve life and oil capital expenditure still appear to be tight.