How Goldman says investors should navigate a new 'postmodern' cycle in markets

Goldman Sachs strategists, led by Peter Oppenheimer, assert the market has entered a new 'postmodern' super cycle, the fourth since World War II, distinctively marked by historically high valuations, persistent higher interest rates and inflation, and swelling government debt. These factors are expected to weigh on aggregate corporate profits, increasing dispersion between winners and losers. Despite these challenges, Goldman identifies key investment opportunities in continued technology growth, particularly AI, advancements in services and manufacturing driven by technological integration, and strategic diversification into undervalued non-US markets to supplement concentrated US holdings.

Analysis

Goldman Sachs strategists have identified the current market environment as a new 'postmodern' super cycle, the fourth since World War II, which presents a structural shift from previous eras. This cycle is uniquely characterized by three primary headwinds: starting from historically high valuations, as indicated by the S&P 500's Shiller P/E ratio, which implies lower absolute returns ahead; a regime of structurally higher inflation and interest rates, contrasting with the declining rate environment of the past two cycles; and swelling government debt, which is driving up borrowing costs. Goldman anticipates these factors will weigh on aggregate corporate profits but will also widen the performance gap between 'winners and losers'. Despite these challenges, the firm highlights three significant opportunities. First, the technology boom, particularly in Artificial Intelligence, is expected to continue driving market performance. Second, this tech boom will create a symbiotic relationship with the physical economy, generating opportunities in services and manufacturing sectors involved in building out essential infrastructure like data centers and electricity grids. Third, while the US is expected to lead returns, strategists recommend diversifying into more cheaply valued non-US markets, referencing the All Country World Index ex. US ETF as a means to supplement and de-risk concentrated US positions.

Key Decisions for Investors

• Given expectations of lower aggregate market returns and higher dispersion, investors should prioritize active stock selection to identify companies with durable competitive advantages capable of thriving despite macroeconomic headwinds.
• Consider increasing exposure to secular growth themes, such as artificial intelligence, and the ancillary sectors in services and manufacturing that support the required physical infrastructure build-out, including data centers and electrical grid suppliers.
• It is prudent to supplement core US equity holdings with strategic allocations to undervalued international markets, such as those represented by the ACWX ETF, to enhance diversification and capture relative value.
• Investors must closely monitor inflation trends and government debt levels, as persistent increases in these metrics pose a significant risk to equity valuations by elevating long-term interest rates and borrowing costs.