Choosing U.S. Stocks: A Sensible Investment Despite Elevated Valuations

 Goldman Sachs Wealth Management suggests that despite high valuations, U.S. stocks remain the most promising avenue for robust returns in the upcoming year. The Investment Strategy Group at the wealth manager holds the belief that the U.S. continues to be the leading global market, anticipating a continued rise in earnings for U.S. companies.

Sharmin Mossavar-Rahmani, CIO of the wealth management group, highlighted the consistent upward trend in earnings unless faced with a recession or unforeseen shocks. Despite U.S. stocks appearing overvalued by certain metrics, historical data shows that such high valuations have not reliably predicted future returns.

The annualized returns of U.S. stocks from the financial crisis in March 2009 through December last year stand at an impressive 16%, outperforming developed countries outside the U.S. and China. Last year alone, the S&P 500 recorded a return of 26%. The Goldman report indicates that a $100 million investment in U.S. stocks would have grown to nearly a billion, while the same amount invested in Chinese stocks would only be worth $229 million, with 30% more risk.

The Investment Strategy Group projects that U.S. stocks are likely to deliver mid- to high single-digit returns in the coming year, even though this is significantly lower than the 26% return of the S&P 500 in the previous year. Goldman Sachs advises against timing the market solely based on valuation, emphasizing the penalty for prematurely exiting equities.

The resilience and diversity of the U.S. economy, coupled with expectations of interest-rate cuts by the U.S. Federal Reserve, support the group's optimistic outlook. Mossavar-Rahmani contrasts the balanced U.S. economy with China's reliance on debt-financed investments, resulting in a debt-to-GDP ratio exceeding 300%, according to the strategy group's 2024 investment outlook.

The group acknowledges the potential outperformance of non-U.S. markets, including emerging markets, in 2024 but advises investors to stay invested in U.S. stocks. The bank recommends a 74% allocation to U.S. stocks in its model portfolio, citing the upward trend in earnings and prices. Despite acknowledging the rise of artificial intelligence technologies and global geopolitical risks, Goldman Sachs remains bullish on the profitability of U.S. firms.

In terms of investment allocation, Goldman Sachs favors private markets, including private equity, private credit, and real estate. The bank believes in the value of staying invested in private assets, citing opportunities for adding value, particularly for ultra-high-net-worth clients.

While the Securities and Exchange Commission (SEC) has recently approved spot Bitcoin ETFs, Mossavar-Rahmani dismisses their place in the U.S. equity mix, reiterating Goldman Sachs' stance that the cryptocurrency market is speculative rather than a solid investment asset class.

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