Although the stock market is up more than 25% since the end of October, driven largely by a small group of U.S. large-cap technology stocks, family offices are still looking for investments in long-term secular growth trends in their diversified portfolios.
A rally of this magnitude could understandably lead investors to worry that a market correction may be imminent. But choosing to reduce market exposure based on concerns about pullbacks could come with steep penalties: annualized returns through December 2023 for investors who miss out on the S&P 500’s 50 best trading days since June 2009 The rate was only 0.70%, while the remaining investors had an annualized return of 14.2%. invest.
With the S&P 500 trading at about 21 times 2024 earnings, U.S. stock market valuations are high relative to global peers. However, investors focused on growing multi-generational wealth should be aware of the characteristics that make U.S. investing so attractive.
In addition to being the world’s largest economy and the most productive labor force, U.S. financial markets also offer excellent opportunities for long-term growth areas and technological innovation, especially generative artificial intelligence.
Tech stocks are valued at higher valuations than the overall market – the “Magnificent 7” giant stocks are valued at about 30 times expected 2024 earnings. However, investors should consider why this is the case: Magnificent 7 has a strong balance sheet, high profit margins, and is expected to grow annual sales by approximately 12% over the next three years. The total market share is only 3%.
While the AI-fueled rise in these stocks has been undeniably dramatic—28% annualized returns since December 2019—nearly all of the returns (about 27%) have been attributed to earnings growth (20% is sales growth, 7% is revenue growth). in the form of profit expansion).
Family office investors should be prepared to use market pullbacks as opportunities to selectively increase long-term equity investments. With uncertainty over interest rates and this year’s election, coupled with more than $8 trillion held in money market funds, investors should be in a good position. Over the long term, stocks have provided durable growth: over any rolling 20-year period since 1926, stocks have delivered positive real returns.
Outside the U.S., Japanese stocks have been in the spotlight as earnings growth for the fourth quarter of 2023 was 32%, rather than the 10% expected at the start of earnings season. While we note that Japanese stocks have risen sharply, the country’s corporate governance reforms and transition to an environment that encourages higher inflation should provide compelling long-term tailwinds going forward. Furthermore, with only 13% of Japanese household capital allocated to stocks (compared to 40% in the United States), a more attractive growth backdrop could lead to an influx of Japanese retail funds into the domestic stock market.
In fixed income, with interest rates likely to peak, investors should consider selectively adding duration to their portfolios. With inflation expected to continue falling to an average of 2.4% this year, which will prompt the Federal Reserve to start cutting interest rates in June, the 10-year Treasury note may provide a more meaningful return than cash.
Within corporate credit, a tactical overweight in high-yield bonds is recommended as there is more room in spreads if the economy continues to perform well. Conversely, the value of investment grade bond spreads may have declined, back to 2021 levels.
Alternative assets have long been a driver of returns and should continue to play a meaningful role in long-term asset allocation. Historically, investors have been handsomely compensated for illiquidity in private markets: for example, the top quartile of buyout private equity managers’ annual performance compared with the MSCI World Index The return rate increased by 7%. Investors should “review” recent market conditions and implement regular, rigorous commitments to private assets.
Private credit assets have grown significantly since the global financial crisis, most recently as a result of equity-like returns being realized in a higher interest rate environment and aided by rising spreads that private lenders can command. In addition, the closer relationship between borrowers and lenders than in the broader syndicated loan market may result in greater flexibility and better outcomes for both parties if a borrower has difficulty meeting its repayment obligations.
A “soft landing” remains the most likely scenario for 2024. Positive momentum should support investor sentiment and drive a resurgence in IPO activity, which is already off to a good start: global IPO issuance is up 53% in 2024 and global IPO issuance is up 225% in 2024. U.S. private equity investment should similarly pick up as sponsors become more confident in public markets as an exit mechanism for portfolio companies.
Investors have undoubtedly seen asset price swings across stocks, bonds and alternatives since the outbreak began. The S&P 500 is up more than 130% since its March 2020 lows, and as inflationary pressures recede and bond yields are likely to continue to normalize, we believe the key to staying calm and focusing on a diversified portfolio during uncertain times is Merits are the best options for achieving long-term returns for multiple generations of investors.
Sara Naison-Tarajano is global head of capital markets for Goldman Sachs Private Wealth Management and co-lead of the One Goldman Sachs Family Office Initiative
