Goldman Nailed The Outlook For 2023. It Sees Another Rose-Colored Year Ahead.

Goldman Sachs has got to be feeling a bit smug right now. When it first released its optimistic outlook for the US economy for this year, there were some serious doubters. But that rosy view has been on the mark. Now, the investment bank is out with another positive forecast – this time for 2024 – and anticipating upside in most of the world’s stock markets. Let me tell you what it says and offer some investing ideas that’ll help you hop aboard Goldman’s self-satisfied bandwagon…

What’s Goldman see happening next year?

Let’s start with the big picture – it’s a beauty. Goldman sees the big stock indexes in the US, Europe, Japan, and much of Asia all moving higher. Have a look.

Here’s what Goldman Sachs sees happening with key stock market indexes, broken down in local currencies and US dollars. Source: Goldman Sachs.

It expects 8% price returns and 10% total returns (including buybacks and dividends) for global stocks in 2024. It sees Asian stocks (excluding Japan) as having the biggest contribution from earnings growth, and it expects Japan to experience the most positive contribution from rising valuations.

As a backdrop for all this, Goldman says it believes inflation and interest rates have both peaked. And like before, it still expects to see a soft landing outcome, in which interest rate increases bring inflation down without crashing the economy. And that should produce a positive outcome for stocks, although limited profit growth and relatively high valuations, especially in the US, will probably limit the upside.

Goldman recommends a mixed-bag approach to regional asset allocations, but it favors Japan above all others. Asia broadly and Japan specifically are trading in line with their longer-term averages, while European and UK stocks are cheaper than they typically have been.

Here’s how stock valuations look across various regions. Sources: Goldman Sachs, FactSet.

Orange diamonds represent current valuations. Gray squares represent their long-term averages.

As you can see, the price-to-earnings (P/E) ratio for the US is higher than its long-term average. Still, outside of the tech sector, US stock valuations are trading only slightly above their long-term average. UK stocks, meanwhile, have the cheapest valuation.

This year, rallies in Japanese and US stocks have been driven primarily by a “valuation re-rating” or an expansion of their P/E ratio.

Year-to-date total return across various markets. Source: Goldman Sachs.

Japan has experienced the biggest valuation re-rating (dark blue section of the bars), with the other drivers being earnings per share contributions (light blue) and dividends (gray).

Goldman’s estimates suggest that there will be single-digit earnings growth in all regions, except for Asia (excluding Japan), where the prospects for earnings growth are up in the teens, having started from a very low base. Total shareholder returns – dividends and buybacks – have increased in recent years in Europe and Japan, and remain stable in the US.

What’s the opportunity here?

This year, the market outperformers have mostly depended on which region you’re looking at.

In the US, which holds a leading position in AI and mega-cap tech, growth has solidly outperformed (dark blue line). But in Europe (light blue) and Japan (gray), value has won the day.

Performance of Value and Growth for 2023 by region. Sources: Goldman Sachs, Datastream.

Goldman is firmly in the “AI is not a bubble” camp: it says tech companies with strong balance sheets and cash flow generation should continue to perform well, despite how high their valuations are, relative to the sector’s history. So that could be a good place to start as you review your portfolio for the new year.

Sector valuations for MSCI World current versus 20-year average. Sources: Goldman Sachs, Factset, Datastream.

That said, you never want to go all-in on a single sector or investing style. So, to balance things out, it’s worth having a look at value stocks – particularly in the energy and financial sectors – as the recent weakness in those shares has created some nice entry points. After all, the downside for value stocks should be fairly limited if we avoid a recession – and dividends and buybacks should provide sufficiently attractive returns.

With all the major stock markets expected to gain next year, the iShares MSCI World ETF (ticker URTH; expense ratio 0.24%) is an easy way to gain broad-based exposure. And with American Big Tech expected to continue to do well, you could consider topping up with some Invesco QQQ Trust Series ETF (QQQ; 0.2%).

To take advantage of a potential rise in energy and financial stocks, you could consider investing in either or both of Buffett’s preferred US energy stocks: Occidental (OXY) or Chevron (CVX). Or you could opt instead for British or European oil giants like BP (BP), Shell (SHEL), or TotalEnergies (TTE) – all of which trade at cheaper valuations.

To bet on a rise in Japanese stocks, you could buy the iShares MSCI Japan ETF (EWJ; 0.5%) or you could follow in Buffett’s footsteps and buy one of his favored trading companies: Mitsui (8031), for example, has considerable energy exposure. Japanese banks also look cheap and have the potential catalyst of further changes in interest rates from the Bank of Japan. MUFG (MUFG) is the biggest by market capitalization and has just announced a share buyback and an increase to its full-year earnings forecast.