Goldman Names Top Investment Targets for 2024’s 2nd Half, as Rates Dip

Lower interest rates could be boons for bonds (including both junk and investment grade); small-cap stocks (long in the ditch); and European equities (staging their own comeback from economic slowdowns and war).

That was the message from Goldman Sachs Asset Management’s mid-year outlook, released Tuesday, as the firm welcomed a new era of rate decreases: “Expectations of U.S. rate cuts were repeatedly pushed back in 2024’s first half due to inflation pressures, while other central banks signaled the intent to or began to cut rates,” Ashish Shah, Goldman’s CIO of public investing, told a news briefing Tuesday.

He warned that there still is significant instability, particularly given conflicts in Ukraine and the Middle East, plus the upcoming U.S. presidential election, but noted that opportunities are rife in many spots. He pointed to investments in the artificial intelligence and sustainability sectors.

Shah described the ongoing trend toward lower rates, with the Federal Reserve expected to cut later this year, the Bank of England on the same track, the European Central Bank dropping rates in June and, per the firm’s written analysis, “China’s policymakers maintaining an easing bias.”

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Lindsay Rosner, Goldman’s global head of multi-asset fixed income, observed that the threat of a recession appears to have dissipated, so these days, “investors are not demanding too much compensation for credit risk” and “corporate balance sheets are generally healthy.”

This presents opportunities in several areas, Goldman strategists suggested, such as:

Bonds. It’s axiomatic that, when rates fall, fixed-income prices rise. Some bonds are the best positioned for a rate drop, in Rosner’s view. She cited investment-grade bonds of large banks (lower rates mean more loans on which banks can collect fees and other income) and high-yield debt from industrial and energy companies (they both need lots of debt, and healthy ongoing economic growth is friendly to revenue in both sectors).

In addition, Rosner said, “AAA-rated collateralized loan obligations are appealing for their attractive carry, supported by strong fundamentals and favorable technical conditions.” Right now, these packages of loans to high-debt borrowers (i.e., leveraged loans) are in strong shape with low defaults and very manageable interest.

Small-capitalization stocks. Smaller companies depend on debt more than larger businesses; thus, rate cuts are always a godsend to them. Shah noted that small caps mostly enjoy nice profit margins and good reported earnings. The Russell 2000 has more than doubled in price since the March 2020 pandemic nadir and still is very affordable—the index’s price-to-earnings ratio, at 25, is only slightly above that of the S&P 500, 22, and below the high-growth Nasdaq 100 at 29.

Many of the Russell 2000’s constituents sport much lower P/Es than the index average, of course. “U.S. small caps are poised to rebound, offering attractive absolute and relative valuations,” Shah commented. “Small-cap companies can provide access to the higher growth potential of future mid- and large-cap leaders.”

European stocks. After a spell in the doldrums, Europe’s equities show signs of a rebound, according to Shah. To be sure, the STOXX Europe 600 (owned by ISS STOXX, which also owns CIO) is up just 8% this year, half of the S&P 500’s showing. France’s CAC is ahead by a mere 1% in 2024, amid uncertainty over the country’s political direction ahead of its recent snap election. Certain individual exchanges are doing much better, though: Stocks in the Netherlands are up 18% and in Denmark 25%.

Nonetheless, lowering inflation prompted the ECB to push down rates. Labor markets are strong, along with wage growth. “Europe’s improving growth and inflation mix, combined with better corporate earnings dynamics and modest valuations, bodes well for” its equities, Shah stated.