Goldman Sachs Asset Management predicts that the 'upside' for U.S. stocks is limited.

• According to James Ashley, head of international market strategy at Goldman Sachs Asset Management, while we believe that U.S. equities are currently fairly valued, there is limited potential for growth at these valuations, as stated on CNBC on Wednesday.
• According to Ashley, GSAM views India as a "strategic long-term growth story" in emerging markets, and despite a recent rally, its stock market still presents "significant upside."
• In 2023 and the beginning of this year, Japanese stocks performed well. However, Ashley believes that the recent significant monetary policy shift provides more potential for growth.

According to Asset Management, investors should look for better opportunities elsewhere as U.S. stocks have limited upside due to the macroeconomic backdrop.

Despite the Federal Reserve's aggressive monetary policy tightening over the past two years, the U.S. economy has shown surprising resilience and is not expected to enter a recession in 2023.

According to James Ashley, head of international market strategy, if a recession were to occur, it would happen this year, despite GSAM's base case predicting a soft landing and avoiding a recession.

Ashley stated that the Fed started hiking in March '22, so discussing recession risks in 2023 would have assumed a very rapid passthrough from monetary policy to the real economy. However, this was premature.

"If a recession were to occur, it would likely take about two years for monetary policy to take effect, according to the base case scenario. However, if a recession were to occur, it would be in 2024, not 2023."

The Fed maintained its interest rates at a range of 5.25-5.5% at its March meeting, and markets anticipate a 25 basis point reduction in June as the central bank starts to ease its tight monetary policy due to declining inflation and a sluggish economy.

Ashley observed that for stock markets, "a little bit of weakness is beneficial" because it creates disinflationary pressure, which allows the Fed to reduce interest rates. However, since the market has already anticipated most of the policy loosening, GSAM believes that the recent bull run may be nearing its end.

"Although we believe that U.S. equities are currently fairly valued, there is limited potential for growth at these valuations. We suggest exploring other markets for better investment opportunities," he concluded.

India

According to Ashley, the asset management arm of the Wall Street giant views India as a "strategic long-term growth story" in emerging markets.

In contrast to other economies experiencing a slowdown due to both secular and cyclical factors, India is experiencing a significant increase.

"The economy is projected to experience rapid growth in nominal GDP rates for the near future."

Although Indian markets have experienced a recent rally, Ashley acknowledged that it is not accurate to claim that the country's stocks are currently "cheap." However, he emphasized that there is still "significant upside based on that growth story."

What is the process for playing that game? There seems to be a widespread narrative that applies to all sectors, not just one specific area. In the small and mid-cap market, there is a significant potential to generate alpha.

Japan

Unlike many central banks in major economies, which are considering reducing rates, the Bank of Japan recently increased them for the first time in 17 years, marking the end of its experiment with negative rates and unconventional easing methods aimed at stimulating the world's fourth-largest economy.

In 2023 and the beginning of 2024, Japanese stocks were a strong performer. However, Ashley believes that the significant monetary policy shift provides more potential for growth.

"Japan's central bank aims to "embrace" inflationary pressures instead of "choking them off," as the country's economy is the only major one where inflation is not a problem but a solution to a 30-year-old issue."

From an equity perspective, firms now have more pricing power due to the current market conditions. In our view, Japan is the most attractive option for both the short-term and long-term, indicating that there is still significant potential for growth.