2020 Outlook for US Stocks...Carlyle Co-Founder David Rubenstein on Leadership...Asset Allocation Views

[Goldman Sachs]( [BRIEFINGS] January 7, 2020 What’s the Outlook for US Stocks in 2020? The bull market in US equities will live to celebrate its 11th anniversary in 2020, according to David Kostin, Goldman Sachs Research’s chief US equity strategist. While questions surrounding the presidential election are likely to limit gains early in the year, Kostin sees the S&P 500 rallying once the political uncertainty is lifted to end the year at 3,400. Core to his outlook is a forecast for corporate earnings to grow about five percent and for the multiple that investors are willing to pay for those earnings to hold steady. “The idea of the fundamentals is really critical in terms of discussions with clients,” Kostin says in the latest installment of the Exchanges at Goldman Sachs podcast. “Each portfolio manager with whom I speak has different assumptions, based both on their own political biases as well as their own forecast of what’s likely to take place based on polling data, etc. And so really the fundamentals come down to, ‘What is the likely path of profits, and how are we going to value those profits?’” [Listen to podcast]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=What%E2%80%99s%20the%20Outlook%20for%20US%20Stocks%20in%202020%3F&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Fpodcasts%2Fepisodes%2F01-06-2020-david-kostin.html) Talks at GS with Carlyle Co-Founder David Rubenstein Above (L to R): John F.W. Rogers of Goldman Sachs and David Rubenstein of The Carlyle Group “The best way to make your way in the world is to be a leader,” says investor, philanthropist and television host David Rubenstein, who co-founded The Carlyle Group in 1987 and built it into one of the world’s leading private investment firms. “And how do people become leaders?...By persuading people to do what we want,” Rubenstein explained in a recent episode of Talks at GS. In his new book, The American Story: Conversations with Master Historians, Rubenstein explores that theme and others that have shaped the course of American history. “I think the really great presidents are people that can persuade other people,” said Rubenstein, who also serves as chairman of the Smithsonian Institution and the Council on Foreign Relations. “If you can't persuade other people, Congress isn't going to do what you want, the American people aren't going to do what you want… The powers of persuasion that [President Lyndon B.] Johnson had were legendary because he would get close to you, and he'd make you feel like the whole world depended on you.” Persuading others through written and spoken words is key in any sphere of life, Rubenstein said, but the most effective form of persuasion is through action. “It’s leading by example, doing something,” Rubenstein said. “If you say to people, ‘you’ve got to work hard’—do it yourself. You say to people, ‘pick up the trash’—do it yourself. That’s what really great leaders do.” [Watch video]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Talks%20at%20GS%20with%20Carlyle%20Co-Founder%20David%20Rubenstein&body=https%3A%2F%2Fwww.gs.com%2Finsights%2Ftalks-at-gs%2Fdavid-rubenstein.html) Briefly…the 2020 Asset Allocation Outlook A modest pick-up in global growth is expected to greet investors in 2020. While this optimism has seen investors shift to riskier assets, Goldman Sachs Research’s Christian Mueller-Glissmann says there’s a risk that they could be disappointed…eventually. We sat down with Christian to discuss multi-asset themes and risks for 2020. Christian, how are investors positioned for the new year? Christian Mueller-Glissmann: Global growth worries, in part due to US/China trade tensions, pushed investors to take more defensive positions in the first half of 2019. Boosted by easier monetary policy, they limited their growth exposure and focused on the search for yield. Growth concerns have started to subside and a moderately more optimistic outlook has supported a rotation towards riskier assets, encouraging investors to increase their pro-cyclical exposure. But the markets have moved quickly to reprice for an expected rise in global growth since the summer. As a result, the markets may have overshot—we’ve only seen a moderate pick-up in global Purchasing Manager Indices so far. In the near term, increasing policy uncertainty and growth-related risks could lead to disappointment. What are your asset allocation preferences for 2020? CMG: Most assets performed well in 2019, producing positive returns across the board. While we don’t expect 2020 to be as strong a year for multi-asset portfolios, we anticipate positive returns for equities due to the modest pick-up in growth and elevated equity risk premiums. We also expect global bond yields to pick up. So, we’re modestly pro-risk in our asset allocation recommendations, with an overweight in equities and underweight in bonds. However, on a 12-month horizon we’re moderating our pro-cyclical asset allocation with an overweight in cash because return potential across assets is more limited following such a strong year. Also, we prefer equities to credit because credit spreads are already very tight, creating a poor risk/reward. What’s your view on stock market valuation? CMG: While the macro backdrop should be broadly favourable for equities in 2020, buoyed by loose financial conditions and a resilient US consumer, we believe a large portion of the growth momentum is already priced. The strong 2019 equity performance was driven by valuation expansion, as profit growth has generally remained subdued. If this is met with limited earnings growth, we’ll only see moderate returns in 2020. But late cycle there is always the potential that valuations overshoot as well. The correlation between equities and bonds has been a central theme of 2019. How will this relationship play out in 2020? CMG: With our base case expectation of gradual increases in bond yields, from low levels and mostly driven by breakeven inflation, we think that equity/bond correlations should remain negative. However, after the large increase in 10-year yields so far, a continued bond selloff could drive indigestion for equities. On the flipside, with lower bond yields and less potential for further monetary policy easing, bonds might provide less of a buffer during equity corrections. What are the key risks as we enter 2020? CMG: Ongoing political events and policy uncertainty are key considerations. While the impact of the US/China trade tensions should be less negative in 2020 with recent progress on a deal, eventual disappointments cannot be ruled out and weaker China data could reduce risk appetite. There are also downside risks to earnings expectations due to margin pressures. This risk is most prominent in the US, where there are potential headwinds from global trade tariffs, rising input costs and wage growth, as well as potential US tech regulation, which has been a focus into next year's US presidential election. And of course further tensions in the Middle East and sharp increases in oil prices might weigh on risk appetite. SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Briefly%E2%80%A6the%202020%20Asset%20Allocation%20Outlook&body=) Goldman Sachs Media Highlights eFinancialCareers - December 31 [Goldman Sachs' investment banking hiring plan for 2020]( Bloomberg - December 20 ['Unstoppable' Global M&A Faces Slower 2020 on Markets, Politics]( [Subscribe]( [Unsubscribe]( The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. Goldman Sachs has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data. 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