Podcast Summary: Goldman Sachs Exchanges
Episode: Mid-year outlook: diversify and hedge
Date: June 23, 2025
Host: Allison Nathan
Guests: Christian Mueller-Glissmann (Head of Asset Allocation Research, Goldman Sachs Research), Alexandra Wilson Elizondo (Co-CIO, Multi-Asset Solutions, Goldman Sachs Asset Management)
Episode Overview
This episode provides a comprehensive mid-year outlook on global markets, focusing on how investors should navigate a landscape marked by macro volatility, policy uncertainty, and unprecedented market movements. The guests return for their biannual check-in to discuss the performance of diversification strategies, the unexpected resilience and volatility of key asset classes, the shifting role of traditional safe havens, and best practices for investors looking ahead to the rest of 2025. The key message is to remain diversified, embrace selective optimism, and deploy thoughtful hedging strategies for the volatile months ahead.
Key Discussion Points and Insights
1. The Power and Limits of Diversification
- Diversification’s Success: Both guests agree that diversifying beyond US mega-cap tech into other assets and regions has served investors well so far in 2025.
- “There's two value adds that we can bring as asset allocators to the portfolio, either market timing or diversification. And I think diversification has worked really, really well.” – Christian [01:19]
- Market Timing Remains Tough: The extreme speed of market swings—both corrections and recoveries—proved challenging, especially with the unexpected impacts from US policy and geopolitical risk.
- “The speed of some of the moves we've seen have been absolutely mind boggling…” – Christian [01:43]
2. Macro Surprises and Unusual Market Correlations
- Rare Convergence: Alexandra highlights the “rare convergence of structural, geopolitical and macro tailwinds” influencing markets, with the US dollar and bonds displaying unusual performance in risk-off environments.
- “What's really surprised us has been this rare convergence of structural, geopolitical and macro tailwinds…” – Alexandra [02:25]
- Simultaneous Sell-off: This year, equities, the dollar, and bonds have sold off together—a rare alignment that complicates traditional portfolio construction.
- “We have had a year where equities, dollar and bonds sold off together… that's very unusual.” – Allison [03:26]
- Shifting Correlations: The dollar’s behavior as a risk asset and its heightened impact on non-US investors now require new hedging strategies.
- “Nearly a quarter of a European investor's risk is driven by FX right now in a multi asset portfolio.” – Christian [05:15]
3. Policy Uncertainty and Macro Backdrop
- Economy Cooling, Not Contracting: Alexandra observes a “Goldilocks scenario,” where economic growth estimates rise even as inflation surprises to the downside. The Fed is expected to stay “on hold” with a cautious, data-driven approach.
- “Our expectation is that the economy is going to cool without contracting…one that’s still chugging along.” – Alexandra [06:40]
- Markets’ Resilience Amid Policy Flux: Both guests discuss how the resilience in sentiment and hard data supports markets despite political and legislative uncertainty.
4. Opportunity Set in a Mature Recovery
- Valuations Still High: The so-called “Magnificent Seven” stocks (US mega-cap tech) remain dominant, driven by strong fundamentals like return on equity (ROE).
- “Most of the ROE is driven by the Magnificent Seven…every month this year the ROE has actually ticked up on the S&P 500.” – Christian [10:16]
- Structural Growth & Defensive Positions: Investors should focus on structural growth areas less exposed to the business cycle (like AI), while also using defensive strategies (such as low-volatility equities).
- “We've been quite focused at low volatility…can be a very good way to moderate risk while staying invested.” – Christian [10:49]
- Selective Optimism Over Broad Bullishness: Active management and selectivity are vital as the recovery matures and market opportunities become more nuanced.
- “The opportunity as being more selective optimism rather than broad bullishness.” – Alexandra [11:54]
5. Global and Regional Diversification
- Reassessing US Asset Dominance: Due to US policy risk, geopolitical tensions, and divergent central bank policies, there is a clear push towards global and regional diversification.
- “Diversification is really important… the opportunity set is really different based on where central banks are.” – Alexandra [13:08]
- Europe’s Evolving Opportunity Set: There is selective interest in European sectors benefiting from fiscal spending, banks, and defense—especially as tail risks diminish relative to previous cycles.
- “European banks have been very badly hit…They are now actually looking better.” – Christian [15:35]
- Private Market Potential: Outside the US, private market investments show promise as alpha drivers, benefitting from less competition and localized dynamics.
6. Rethinking Portfolio Construction and Hedging
- Beyond Traditional Safe Havens: Bonds are no longer the reliable hedge they once were; their correlation with equities has shifted. Investors are seeking multi-legged hedging strategies, including alternative risk premia and commodities like gold.
- “Bonds were a positive carry instrument…Now…their kind of returns might be actually lower compared to the yields…” – Christian [18:52]
- “There is no silver bullet...it's more of a constellation of strategies coming together.” – Alexandra [17:16]
- The End of the Easy 60/40 Portfolio: Portfolio construction now requires a more holistic, multi-dimensional approach—balancing asset class, macro, and style/factor risks.
- “It used to be very easy to do well with a 60/40 portfolio. But now…multi asset portfolio management needs to work harder.” – Christian [21:07]
Notable Quotes & Memorable Moments
-
On Market Shock Recovery:
“There's a surprise both how far we and how fast we've come down, but also how fast we've recovered.”
— Christian [01:53] -
On Macro Uncertainty:
“One of the great debates in the market has been, you know, who's going to win between, you know, soft data and hard data.”
— Alexandra [06:40] -
On Selectivity:
“It's an opportunity very ripe for active management…to keep an eye on long term innovation trends and places where you truly believe that the growth trajectory will materialize.”
— Alexandra [12:09] -
Practical Advice for Investors:
“Embrace the positive and hedge the risks. We think that this summer there is a high probability that you're going to see more volatility just given liquidity dries up a bit…It's time to continue to look forward to what the next six months will have.”
— Alexandra [21:50] -
On Hedging in Low Volatility:
“…hedges are relatively cheap again. And I think especially for investors that are sensitive to volatility…there's a really good case to think about hedging the summer kind of risks that you might have.”
— Christian [22:48]
Important Timestamps
- 00:38 — Starting overview, last episode’s advice on diversification revisited
- 01:19 — The difficulty of market timing and rapid market reversals
- 03:26 — Unusual simultaneous sell-off in equities, dollars, and bonds
- 06:40 — Macro backdrop: “Goldilocks” scenario, Fed’s approach, soft vs. hard data
- 10:16 — Magnificent Seven’s role, high valuations, and structural growth
- 13:08 — Regional diversification imperatives, opportunities in private markets
- 15:35 — Europe’s shifting risk and reward profile; sector-specific opportunities
- 17:16 — Alternative risk premia and portfolio re-underwriting in light of new risks
- 18:52 — Rethinking the bond allocation and search for alternative diversifiers
- 21:50 — Alexandra’s core advice: selective optimism and hedging for volatility
- 22:48 — Christian’s advice: neutral positioning and cost-effective hedging
Takeaway for Investors
- Diversification is more crucial than ever, both across regions and asset classes—traditional and alternative.
- Selective optimism and active management are necessary as broad market distortions fade and risk disperses.
- Hedging is essential: With volatility and uncertainty likely to rise, investors should deploy cost-effective hedges.
- The easy era for static 60/40 portfolios is over; new thinking, greater selectivity, and multiple layers of risk management are required for the current market regime.