Despite uncertainties about the sea change that President-elect Donald Trump’s emerging administration is expected to bring, the investment bank expresses “cautious optimism” and offers recommendations for financial advisors in its recently released report, “Reasons to Recalibrate: Asset Management 2025 Outlook.”
“We’ve seen a very strong return profile in the U.S.,” Alexandra Wilson-Elizondo, a managing director with Goldman Sachs Asset Management, said regarding equities during a virtual roundtable held in conjunction with the rollout of the report. “We remain bullish. … And despite the rich valuations, the resilient growth remains intact.” And despite the unknowns, “we do see a lot of strength in the consumer as well as ultimate earnings power over time,” she said.
But as the report’s title indicates, Goldman Sachs analysts say successfully navigating next year’s expected shifts in tariffs, taxes, regulations, inflation, market forces and crises will require recalibrating portfolios.
The Unknowns
The report’s authors acknowledge there are many unknowns regarding Trump’s return to the White House — including tariffs — that could affect the economy and markets. “Targeted tariffs on China may only have a limited inflationary impact. More expansive, universal tariffs across regions, including Europe, may amplify these effects, acting as a drag on growth,” according to the report, which was issued before Trump announced on Nov. 25 that he plans to impose 25% tariffs on Canada and Mexico and 35% tariffs on China.
Another stated Trump policy — mass deportations — also could have an inflationary effect, said Ashish Shah, global co-head and chief investment officer of Public Investing with Goldman Sachs Asset Management, and a panelist at the roundtable. “First and foremost, you have to follow the labor market very closely to understand whether labor has pricing power or not. And I think that the policies limiting immigration or reversing immigration could really force labor prices higher,” Shah said during the roundtable.
A Word on Inflation and Interest Rates
On the other hand, one inflationary pressure, a tight labor market spawned by the pandemic, has eased, Shah said. “We’re back to kind of the normal — people want to maintain their jobs because there’s enough uncertainty as to whether they get another one or not that they’re not going to just quit and take time off and then expect to be able to get back into the labor market,” he said. “And companies equally are willing to have turnover and trim on the edges when it comes to their workforces. So that’s what I would consider to be normalization.”
In the Goldman Sachs report, the analysts predict the Federal Reserve will continue its rate-cutting course. “We anticipate the Fed to deliver an additional cut in December followed by a series of adjustments to a neutral rate of 3-3.25,” the analysts write. “However, we remain cautious as any unexpected increases in inflation could prompt the Fed to pause.”
The report offers assessments, predictions and recommendations regarding bonds, equities and alternatives.
The Bonds to Focus On
While acknowledging that a wide range of macroeconomic outcomes are possible, the authors write that “asset allocation decisions that land on bonds will prove rewarding in 2025.”
Current conditions are creating opportunities to ride the interest rate easing cycle and capture income across corporate and securitized credit, they say, adding that “an active investment approach, diversification and strong risk management will be paramount.” The main threat to fixed income success is rekindled inflation, which could slow down the pace of easing. Aside from that, the report presents four economic scenarios and the bonds that will be advantageous for each:
Economic acceleration: Measured easing is expected if inflation is in check. Core fixed income benefits from ongoing easing, while high yield credit and emerging market debt also benefit.
Soft landing: Continued easing is expected. Broad-based fixed income sees gains.
Softish landing: Accelerated easing to lower rates is expected, which will be beneficial for core fixed income and result in steeper curves.
Hard landing: Sharp, steep easing to lower rates is likely. High-quality sovereign bonds benefit.
“Investment grade bonds stand out as an option for enhancing portfolio returns in 2025, in our view, striking a balance between earning income and risk management,” the authors write.
However, they recommend an “agile approach” that will allow investors to determine the most compelling risk-adjusted returns.” Active bond selection is advised, as any regulatory changes are expected to have sector-specific effects, according to the report.
In the securitized credit sector, Goldman Sachs said commercial mortgage-backed securities are the most compelling choice, with the spreads of AAA- and BBB-rated issues appearing attractive in a fair value assessment.
Broadening Equities
Goldman Sachs noted that the U.S. equities market, currently dominated by the Magnificent 7 tech stocks and large caps, is near its highest level of concentration in 100 years. “And for valid reasons: their earnings have outstripped those of the global market for more than a decade,” the analysts write.
During the roundtable, Shah said the power of artificial intelligence (AI) will be felt soon.
“We do believe that you’re on the leading edge of starting to see the use cases develop,” he said. “And that in 2025, you’re going to start to see not at a macro level, but you’re going to start to see companies not have to hire as rapidly and really start to benefit from some of the aspects of AI as it gets rolled out. And that’ll carry into 2026 as that expands.”
Reality Check
But the Goldman Sachs analysts caution that despite the transformative promise of AI and strong fundamentals among many of the leading tech companies, “the level of market dominance is not sustainable.”
Because the performance of the S&P 500 Index is heavily dependent on a small number of stocks, passive investments in U.S. large cap indexes may pose risks to broader portfolios, they warn. However, as interest rates decline, the stock market return structure will broaden, providing motivation for diversification across equity markets, the authors write. “We maintain our cautious optimism on the earnings outlook for 2025 and expect earnings growth to broaden beyond the Magnificent 7, beyond the U.S. and beyond large-cap stocks,” they write.
Despite its current concentration, the U.S. equity market remains one of the most attractive in the world due to the growth of America’s economy and corporate earnings and its culture of promoting innovation. Trump’s expected corporate tax rate reduction and regulation rollback would be a boon for U.S. stocks, they write.
The analysts also see an equity opportunity stemming from what they say is a need to rebuild America’s manufacturing capabilities. Companies that design, build and outfit the “factories of the future” are a “large universe” of investment opportunities in several economic sectors, they write.
Active Management and Offshore Opportunities
“We believe active management can help identify less-obvious businesses with quality attributes of durable growth, attractive valuations, excellent management teams and compelling financials,” the analysts say. “Rigorous stock selection combined with quantitative insights on quality, volatility and valuation metrics may help drive attractive risk-adjusted performance across sectors.”
In reviewing offshore equity opportunities, Shah, the panelist, said India stands out for its rapid growth and technical depth. Noting that many Goldman Sachs employees are based there, he said. “It’s one of the most dynamic places that any of our employees end up visiting because there’s just growth going on everywhere. There’s infrastructure that’s being built, there’s technology that’s being invested in. And India ends up benefiting from every other country that is looking to create leverage in areas like AI from this deep talent pool that is very technical.”
Exploring Alternative Paths
Alternative investments will continue to evolve in 2025, drawing a broader base of investors, Goldman Sachs predicts. Investment opportunities are expected in a range of sectors, including private equity, private credit, real estate, infrastructure and hedge funds, the analysts say.
Video roundtable panelist Jeffrey Fine said private capital markets saw a slowdown in deal volume and new capital formation during the Fed rate-tightening cycle, although valuations largely held steady in private company portfolios. However, the sector is starting to turn around, with deal volume increasing across almost all categories this year, said Fine who is global co-head of Alternatives Capital Formation with Goldman Sachs Asset Management.
“And we expect that deal volume to continue to increase, and we expect 2025 to be a really important year for transaction activity as legacy owners look to divest,” Fine added.
With an uptick in private market activity expected, Goldman Sachs analysts offer a note of caution: “Private market investments often span multiple administrations, so over-indexing to a current administration can be an unintended source of risk,” they write.
The analysts report there is an increasing need for growth equity capital because venture-backed companies are staying private longer and need additional funds to finance the next steps of their journeys.
The Goldman Sachs analysts report that there is a backlog of 750 “unicorns” — private companies of least $1 billion valuation, which they estimate would take 10 years to clear if the firms go public at the average rate of the last 10 years. “This suggests there will be greater demand for growth capital to fund the transition from late-stage venture capital to freestanding enterprises,” they write.
Real Estate and Private Credit
In the real estate sector, the authors say lower rates will result in more transactions by reducing the cost of financing. They note that REITs are trading at a discount, an indication of where investors anticipate fair value may land. However, those discounts may be “overly punitive” and less than what private asset sales could bring, they say. “This adjustment process may prove painful to some assets,” they write. “However, we view it as a necessary step on the way to broader market recovery and greater confidence in the asset class.”
Fine predicted growth of private credit in the alternative space. “Private credit is going to occupy a more sizeable allocation within most investors’ portfolios,” he said. “As alternatives grow relative to the traditional 60/40, I think what private credit really represents is a stable yield portion, for medium to long duration in people’s portfolios.” Private credit offers a premium to trading liquidity, “which I think a lot of investors are willing to do now,” Fine said.
Words of Caution
The report analysts and webinar speakers all offered words of caution about 2025.
Although AI will have a transformative effect, one of its costs is greater power consumption, the report authors say. They note that a ChatGPT search consumes six to 10 times more power than a traditional Google search. Other developments that will put heavy demands on the power system include growing heat waves and expected American reindustrialization, the analysts say.
They predict, however, that the transition to sustainable energy will continue. “We expect the underlying commercial drivers of sustainable investment opportunities to remain resilient, regardless of the political backdrop and direction of near-term policy priorities.”
Fine said he is worried about excessive capital concentration: “Lots of capital are chasing a lot of the same themes, be it in housing, logistics, or even in data centers,” he said. “That’s compressing returns expectations a bit.”
And Shah warned that widely held expectations have been wrong in the past and may fall flat again. “(It’s) a bit terrifying how consensus the market has become,” he said. “We saw that at the beginning of 2023, that we’re definitely going to be in a recession, and you got to see the complete opposite.”
“And so, I’m a little bit concerned,” Shah said, “about how consensus the market’s become around the fact that everything’s going to go well.”
In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News.
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