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- [00:01]
A
After dropping steeply amid recession fears, US Stocks are just about where they were heading into the April 2 so called Liberation Day when President Trump first announced surprisingly high tariffs on America's trading partners. So what could be ahead and how should investors position their portfolios now? I'm Alison Nathan and this is Goldman Sachs exchanges today. I'm joined again by David Costin, our chief US Equity strategist in Goldman Sachs Research and and by Patty Rafael, Global Co head of the third party wealth management business in Goldman Sachs Asset Management. They both recently presented at the RIA Professional Investor Forum where they spoke to some of the largest independent investment advisors in the country. David Patty, thanks for joining us.
- [00:44]
B
Thanks for inviting us.
- [00:46]
C
Super delighted to be here. Thanks Alison.
- [00:48]
A
So David, stocks are still down year to date, but as I just said, they are now back to pre Liberation Day levels even though tariff policy and the impacts on the economy and companies are still very uncertain. So what do you make of this recovery?
- [01:06]
B
Alison the way I would characterize the performance of the equity market in the last month has been the great concern that shocked the market when the President announced the tariffs and the so called Liberation Day and the market quickly pivoted to the idea there's a really dire outcome and the prospects of recession were quite elevated as a result. And the surprise that happened a week later on 9 April when the President delayed for about 90 days, the tariffs gave a lot of portfolio managers the confidence that the off ramp was there and that ultimately the tariffs that had been discussed on 2 April probably would not be implemented as originally proposed. And as a result the equity market has had a tremendous rally and is currently pricing in our interpretation, an optimistic outcome. And the expectation right now that some fund managers have is that the economy will avoid a recession. And as a result the US Stock market has rallied back at a really feverish pace. And that would be my characterization of what's happening.
- [02:13]
A
And we've also had first quarter earnings which generally are coming out pretty strong.
- [02:17]
B
And first quarter earnings have been better than expected. Coming into the first quarter reporting season expectation was plus 6% year over year growth and it's coming in closer to plus 12. So a pretty substantial beat, larger beats than we've seen the last three years. Last 12 quarters or so usually been around 4 percentage points. So obviously here we had 6 percentage points positive surprise and that's also given investors some confidence that the idea of the economic growth can continue. However, remind you that was the results in the first quarter which went through March 31st. The tariffs came in on the 2nd of April or announced on the 2nd of April, and as a result the first quarter results really are backward looking and the investors really haven't given a lot of importance to that because really what they're focused on is what's the path forward with respect to these tariffs. If I characterize the real topic of debate, which is the US stock market trades at 21 times forward earnings, 20, 21 times forward earnings, which is historically a high multiple with a prospect or probability of a recession, maybe close to 50, 50 right now. And so you would generally not expect the stock market to trade at such a elevated valuation given those high, historically high probability recession. And the only interpretation I can offer is that most of the fund managers have gravitated to the view that we're not going to have a recession that's priced in the market today.
- [03:36]
A
I want to get back to that valuation point. But so as we've just been discussing, I mean there are tariffs that have been implemented that the bulk of some of these tariffs have not been implemented given the pause, but there's still a lot of tariffs that have been implemented. So what do you expect to see from second quarter earnings? Could you begin to see a bigger impact? Is that what you are expecting?
- [03:56]
B
So the debate right now with management is who is going to pay the increased tariffs, is that going to be passed through to the end customers or is that going to be absorbed by the company itself or is there going to be pushback on the supplier and is the supplier going to have to bear some of that burden? And that's a reasonable debate. It will depend on the different industry groups, different nature of the product cycle. There are certainly greater risks in the second quarter results both from a revenue point of view in terms of actually the demand and how consumer behavior has been and the input costs which may squeeze margins as well. So I think there's a lot of concern we're not going to get those second quarter results until middle of July to middle of August, which will also coincide with what is the end of that 90 day hiatus which the deferral of the implementation for a lot of the tariffs until early part of July. So a lot of information is going to be revealed in the next 60 days that we'll know. Now as a fund manager, investors have generally embraced the view that there's an off ramp for some of these hefty tariffs and probably come back to a much lower level than was currently being considered out there right now. I think that largely is priced in the market this optimistic view that there will be an off ramp from a lot of the debate in proposed high tariffs and the market reflects that.
- [05:17]
A
Patty, let me turn to you. You have been talking to investors at the conference. When you think about David's comments and the optimism that has been now priced back into the market, is that what you're hearing from clients as you speak to them?
- [05:32]
C
So first of all, delighted to be live from the RIA PIF, the professional investor forum where we've gathered about 100 of the leaders of the top RIA firms across the country. In aggregate, the investors and the leaders that are here with us and their firms manage $1.3 trillion of their clients capital. And so it's a very important group that we've assembled here. And overall RIAs are a fast growing part of the investor segment in the country. Sentiment right now as we're experiencing it is I would say still pretty uncertain, but super engaged. So the clients aren't shying away from the uncertainty. They're not paralyzed by fear. They're highly engaged with the markets, with solutions and with their clients. And what I would say is there are an increasing range of products in the market that really offer different ways to capitalize on market movements. Whether markets are going up or going down. For example, we have solutions that can benefit from higher levels of volatility in the markets and increasingly looking at short term dislocation opportunities that present really interesting long term portfolio benefits. And so I would say those types of conversations are dominating our time and mind share with those clients.
- [07:14]
A
There's been a lot of discussion about the loss of US exceptionalism. Are you hearing clients considering pivoting away from the US which has obviously been the most popular place to invest for quite some time now.
- [07:28]
C
Sure. So in my capacity as global co head of the third party wealth business, I actually travel intensively across not only the US but Europe and in Asia as well. In fact, I'm heading to Asia next week and I'm heading to Europe the week after that. And so I would characterize slightly different sentiment across the globe from US investors. I would not say shifting away from us, but I would definitely note that there has been a higher interest in some of the international markets, in particular some of the European markets. And so we are seeing a desire to add where people have been already successfully investing globally and internationally to add to some of those positions. I would say from European investors we are seeing a bias towards repatriating towards more home country exposures. And then from Asian investors and I'm being super reductive and generalist here, but I would say US exceptionalism and the brand recognition around US Companies is still very strong. And so my recent conversations with investors from that region, from Asia have not reflected any kind of loss of the shine of US as a destination for investing.
- [08:48]
A
David, from your perspective, listening to what Patti has to say about this, I mean do you think there's more compelling opportunities abroad relative to the US than there perhaps has been in the recent past? How are you looking at this?
- [09:01]
B
Well, I was in London last week and the perspective of the European investors was that the weakening US dollar, an expectation of a secular weaker dollar, does present some headwinds. As a non U S based asset manager owning US assets now, now offsetting that is the US companies have better growth, much higher return on equity and trade at higher valuations. And so the US stock market trades at 20 times earnings right now. The rest of the world trades something like 14 times approximately. But you get much better growth and higher profitability for US corporations. But when you adjust that for growth, if you think about it in terms of a PE to growth ratio, a PEG ratio, they trade pretty similarly and they have over time in terms of that, you're paying a higher multiple. For the US we get better growth. And when it comes down to is, the US has a lot of technology companies which of course everyone knows and they're global leaders and that has been the real allure and been the right strategy for 15 years. And now the concern is fund managers. Well, what is the prospect of these companies given they are investing an extraordinary amount of money in Capex, particularly around artificial intelligence? And what is the return on capital going to be for all those huge dollars dollar amounts that are being invested? So we think about it from a risk adjusted perspective. The US is not as exceptional as it was in the past as perceived given some of the dollar headwinds and there's been a desire to repatriate some capital overseas. We see that in our fund flow analysis that we've seen last couple of months, money is coming for European investors, particular money coming out of the United States back into their home countries if you will. The concern has been the lack of liquidity and so there are other opportunities internationally. So the US is somewhere between 65 and 70% of the global equity benchmark, depends on what benchmark you use. Just the size of the market and liquidity that's here means that investors aren't just going to leave entirely, but on the margin. Money is being viewed as perhaps interesting opportunities over broad right now.
- [11:06]
A
And do you agree with that? I mean, is that something that you think is justifiable?
- [11:11]
B
Well, the Goldman Sachs portfolio strategy team globally, we have been arguing for a broadening of the return structure in the market inside the United States. That would be a equal weighted index as an example, as opposed to a cap weighted index as a way of getting a stronger risk adjust return. And we take that on a global level. The idea of opportunity sets globally in other equity markets somewhat more attractive than the US they certainly started a lower valuation. They've had better returns this year. There's some concerns about the multiple for the US and that is a view that would suggest from a return opportunity set around the world, maybe more attractive than the US right now.
- [11:48]
A
And Patty, we've heard so much about private markets. That's the public markets. When we think about the private markets, private equity, private credit, what are the investment advisors thinking about right now, how we've seen allocations continue to rise? Is the interest growing?
- [12:04]
C
Absolutely. Private markets is definitely coming into the sunlight. I would say as an asset class or as a collection of asset classes around the globe. Again, I would say there is huge amount of interest from a growing base, a broadening base of individual clients as represented by their financial advisors. And I would say from our perspective, from a GSAM perspective, we believe very strongly that individual investors, and particularly high net worth individual investors will benefit from having the same kind of access to institutional grade investing opportunities that the most sophisticated institutions and the wealthiest individuals have enjoyed for decades. And private markets is the perfect example of that.
- [12:56]
A
If you think more broadly, is there anything that investment advisors are focused on that retail investors might actually need to be more focused on than they are?
- [13:07]
C
Yeah, absolutely. One kind of opportunity or challenge in the market that you know, we're paying a lot of attention to is the concentrated stock phenomenon. So there are tens of trillions of dollars of brokerage assets, equity brokerage assets sitting in clients, accounts of which a very large proportion are concentrated, which means more than 25% of the account is dominated by a single position. Investors are often very emotionally attached to these positions. They've been in their family for generations or they're a result of having worked for a company for many years. But history guides that holding a single stock position is a coin toss relative to a broad based index exposure, diversified portfolio, some stats to help bring that to life. Since 1992, there have been 9,227 stocks that have ever been part of the Russell 3000 index. So many of those stocks about 6,000 odd have come out over time, leaving 3,000 odd in there. Today. The median performance of these 9,227 stocks is just 2%, with about 50% of those stocks having exhibited positive performance and 50% negative performance. In fact, if you take those 9,200 odd stocks, you'd see that 46% of them or nearly 50% of those stocks experienced a 75% drawdown during their life, of which 8 out of 10 of those stocks never recovered. Relative to if you'd held the Russell 3000 index through an ETF or a mutual fund, you would have had about a 10% return since inception. So, so that's the value of diversification versus having a single stock exposure.
- [15:06]
A
So, David, we started out this conversation you feeling that the market was perhaps slightly too optimistic relative to some of the risks that we still have in this market today. Again, tariff uncertainty very high. Policy uncertainty in general, very high. Very quickly, if even our expectations in terms of tariffs play out from here, what would that mean for the S&P 500?
- [15:31]
B
So the S&P 500 direction will move higher, the index will move higher under our baseline forecast. Our baseline forecast has the economy growing, albeit at a pretty weak or low rate, but not have a recession. And in that context earnings are growing. And so as we move through the balance of 2025, the investor community will be more focused on the growth into next year and the earnings growth, usually over time will take the market higher.
- [15:58]
A
So yeah, we're somewhat positive as well. What's the downside though? I mean, if we do end up in a more severe because some of the things that are still being talked about, although the market has viewed it as a reprieve, are actually worse than we are expecting. So what's the downside?
- [16:12]
B
So in a downside scenario, earnings could fall by around 10%, could fall much greater amount, of course, but in a scenario looking back in history, earnings typically fall by around 10% in a recession. Again, that's not our baseline forecast. But in a scenario of a recession, you'd have earnings come down and the valuation would contract as well. And so you could see the market at The S&P 500 level, for example, trade around 4,600 in a more recessionary environment scenario. And so balancing those two outcomes, it seems, as the recent news flow would suggest, perhaps there is this off ramp in some of the draconian tariffs that have been proposed originally on the Liberation Day of April 2nd perhaps will be avoided. And as a result the economy is likely to direct itself towards a non recessionary outcome. And in that case of what's priced today in the US Stock market is the more optimistic scenario that we're envisioning will transpire.
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C
Right.
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A
But the risks are wide and the spectrum of outcomes as well.
- [17:11]
B
That's correct. And there are always risks. There's wide distribution of the risks and the market's pricing, the more optimistic scenario, and we think that's probably appropriate given the news flow that we're getting from.
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A
Washington, D.C. david Patti, thanks so much for joining us.
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C
Thanks for having us. Thank you so much, Allison.
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A
This episode of Goldman Sachs Exchanges was recorded on Friday, May 9th. I'm Alison Nathan. Thanks for listening. The opinions and views expressed in this program may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. This program should not be copied, distributed, published or reproduced in whole or in part or disclosed by any recipient to any other person without the express written consent of Goldman Sachs. Each name of a third party organization mentioned in this program is the property of the company to which it relates, is used here strictly for informational and identification purposes only, and is not used to imply any ownership or license rights between any such company and Goldman Sachs. The content of this program does not constitute a recommendation from any Goldman Sachs entity to the recipient and is provided for informational purposes only. Goldman Sachs is not providing any financial, economic, legal, investment, accounting or tax advice through this program or to its recipient. Certain information contained in this program constitutes forward looking statements and there is no guarantee that these results will be achieved. Goldman Sachs has no obligation to provide updates or changes to the information in this program. Past performance does not guarantee future results which may vary. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this program and any liability therefor, including in respect of direct, indirect or consequential loss or damage, is expressly disclaimed Disclosures applicable to research with respect to issuers if any mentioned herein are available through your Goldman Sachs representative or at www.GS.com research hedge HTML.