Goldman Sachs Predicts Favorable Market Outlook Amid Declining Inflation and Steady Growth

Introduction

In a recent client note, Goldman Sachs analysts have painted a rosy picture for stocks and other risky assets in 2024, citing the likelihood of a soft landing and a potential easing of monetary policy by the Federal Reserve. This analysis is based on the firm’s assessment of economic data pointing towards easing inflation pressures and resilient growth, particularly in the United States.

Economic Indicators and the Fed’s Response

Recent economic news has aligned with the Federal Reserve’s objectives of curbing inflation while maintaining economic growth. Notably, the fourth-quarter gross domestic product grew at a robust 3.3% annualized rate, while core inflation, measured by personal consumption expenditures (PCE) prices, increased by a modest 2.9% year-over-year.

Moreover, core PCE rose at an annualized 1.9% pace over the preceding six months and 1.5% annualized on a three-month basis, both below the Fed’s 2% target. These figures suggest that inflationary pressures are moderating, providing a solid foundation for the Fed to consider shifting its monetary policy stance.

Federal Reserve’s Policy Outlook

Goldman Sachs anticipates that the Federal Open Market Committee (FOMC) will signal an end to interest rate hikes and hint at potential rate cuts in its upcoming meeting. While the firm acknowledges that the FOMC is unlikely to commit to a March rate cut, it believes that the path towards easing remains open, contingent upon favorable economic data.

Market Implications

The prospect of a more accommodative monetary policy is generally seen as positive for markets. Goldman Sachs expects periodic fluctuations and pullbacks but maintains a bullish outlook for US equities and credit, anticipating new highs. This optimism stems from the belief that markets are already priced for positive outcomes and that any temporary setbacks present buying opportunities.

The firm’s analysis aligns with current market expectations, as reflected by CME Group data showing a roughly 50-50 chance of a March rate cut and a total of six quarter-percentage-point moves by the end of the year.

Central Bank Easing and Equity Performance

Goldman Sachs highlights the historical tendency for equities to rally after the first rate cut in a rate normalization cycle, particularly when policymakers take precautionary measures against growth concerns that may not fully materialize. This suggests that the broad market backdrop remains favorable for risky assets, supporting the firm’s bullish outlook.

Conclusion

In summary, Goldman Sachs’ analysis paints a positive picture for stocks and other risky assets in 2024. The firm’s optimism is rooted in declining inflation rates, consistent growth, and the expectation of an easing bias from central banks, which is seen as a positive force for markets.

While the road ahead may not be entirely smooth, with potential headwinds such as geopolitical tensions and supply chain disruptions, Goldman Sachs believes that the overall outlook is favorable for investors with a long-term horizon.