A US recession is less likely

- Plus: Is deglobalization exaggerated? # # --------------------------------------------------------------- The key takeaways today: - European stocks could give the U.S. a run for its money - A U.S. recession has become less likely - AI may favor big tech incumbents Was this newsletter forwarded to you? ([Sign up now.]( --------------------------------------------------------------- How countries and companies are reshaping their supply chains The pandemic highlighted the vulnerability of global supply chains, spurring countries and companies to reshape them for a new era of global trade. However, based on trade flows, evidence of global change might be less pronounced than you think. “If we look across trends in trade, investment, immigration and so on, we really don't see a consistent story across the board in terms of deglobalization,” says Andrew Tilton, chief Asia-Pacific economist in Goldman Sachs Research, on [our Exchanges podcast](. “In many areas, like data flows, we're actually seeing acceleration in globalization,” he says. “With the more traditional areas, goods trade and capital flows, we're seeing a slowing down, we'd say, in the rate of globalization — but not a widespread reversal.” That said, a broader push to reshore supply chains is creating investment opportunities, Luke Barrs of Goldman Sachs Asset Management explains. “The push to domestic supply chains, to build greater security in supply chains, and especially critical technology and resources actually is one of the biggest drivers of potential demand in growth that we're likely to see across the public equity landscape,” he says. But semiconductor industry veteran Richard Hill, chairman of the board at Marvell Technology, doesn't see a significant reshaping of the global semiconductor supply chain on the horizon, even if investment flows are shifting in the industry. For one, he argues that the subsidies in the U.S. CHIPS and Science Act — intended to revitalize U.S. semiconductor manufacturing — are only a “drop in the bucket” compared to what would be required to build a domestic industry on the scale required to meet the U.S.'s needs. The lack of a skilled, disciplined U.S. labor force is another major constraint, he says. “In the United States, we have let our most important asset atrophy. And that's the education of our population,” he says. “Semiconductors is not making steel. It's not a physical prowess business. It's an intellectual business.” --------------------------------------------------------------- US stocks could get a run for their money European stocks are trading at a larger-than-normal discount to U.S. stocks: The region's companies are changing hands at about 13 times forward consensus earnings, versus about 19 times for their U.S. counterparts. That discount is the largest it's been in more than a decade and well below the 20% median over the past 20 years. [But there are signs the valuation gap between U.S. and European companies could soon narrow]( says Sharon Bell, a senior strategist on the European Portfolio Strategy team: Higher interest rates could pressure U.S. companies. The U.S. market benefited more than Europe from lower rates given its bigger share of tech and high-growth companies, but stands to suffer more if rates stay higher this cycle, as the team expects. The regulatory and risk backdrop is improving. Stringent stress tests, high capital ratios and other banking rules have made European banks more resilient, the team argues. At the same time, corporate tax rates have fallen for European companies, and the risks around sovereign credit in Europe seem to be receding. Profit margins are reverting. Profit margins and the profit share of GDP are both exceptionally high in the U.S., and these lofty levels might not hold. In fact, the underperformance of European earnings relative to U.S. companies stopped around 2020. The team credits Europe's high share of strong defensive-growth companies and improvement in business models in banks, telecoms and utilities, which has lifted overall earnings. --------------------------------------------------------------- Is sentiment sending a US recessionary signal? U.S. manufacturing sentiment, a leading economic indicator, has plunged to recessionary levels. But Spencer Hill, a senior economist from Goldman Sachs Research, [says there's more to the story. Â]( Hill points out that survey data is much less informative when overall sentiment is either very positive or very negative. With recession fears running rampant, business leaders may be excessively pessimistic. The same surveys tell us that objective measures, such as production and employment, have held up much better than sentiment. The dour sentiment readings “tell us that people are worried about recession, not that one is actually imminent,” Hill concludes.  [Watch our video to learn more.]( --------------------------------------------------------------- Forecast Change: 25% chance of US recession in the coming year The probability of a U.S. recession in the coming year has declined, as the risk of a disruptive debt-ceiling fight has disappeared and stress in the banking sector appears to be only a modest drag on the economy, according to Goldman Sachs Research. [Our economists say there's a 25% chance of recession in the next 12 months]( down from their earlier projection of 35% shortly following the failure of Silicon Valley Bank in March. The U.S.'s agreement to raise the nation's debt limit will result in small spending cuts that are expected to leave the economy's trajectory unchanged over the next two years, while turbulence among regional banks is forecast by Goldman Sachs Research to subtract about 0.4 percentage points from real GDP growth this year. Furthermore, researchers forecast core PCE inflation to come down to 3.7% by December 2023, with sequential rates averaging 2.9% in the second half of the year. --------------------------------------------------------------- The Markets: Does this AI rally have legs? 🎙️ Tech stocks' higher valuations are supported by strong fundamentals, Sung Cho, co-head of Tech Investing for Fundamental Equity in Goldman Sachs Asset Management, explains in this week's Markets podcast from Goldman Sachs Exchanges. About 75% of tech companies' earnings this quarter have surpassed analysts' expectations for sales and earnings, he notes. “AI is contributing, but tech is really, really strong against the weaker economic backdrop,” he says. “The recent rally around tech stocks associated with AI has legs because it's fundamentally driven.” Start your Friday mornings with our new podcast, [The Markets, from Goldman Sachs Exchanges]( In just 10 minutes or less, we break down the key issues moving markets. Find us wherever you listen to podcasts. --------------------------------------------------------------- AI may favor big tech instead of small startups As businesses rush to tap the promise of generative artificial intelligence, large incumbent technology companies may stand to gain the most, [according to insights from Goldman Sachs analysts shared during our TechNet Asia-Pacific 2023 conference in Hong Kong:]( The costs are significant. Development of the large language models that underpin AI chatbots and other tools is expensive. Some industry estimates suggest that it costs $500 million for the hardware and another $500 million to train the model, says Ronald Keung, head of Asia internet research. This is why it's “mostly the larger players doing a lot of these large language models,” Keung says. In the end, there may be a few large language models sitting atop many specialized vertical applications, he adds. Regulations will come quickly. Regulation of generative AI may occur in parallel with the development and commercialization of the technology, our analysts say. Governments are wary of the potential impact on labor, for one thing. The impulse toward early regulation of AI technology may also favor large, well-capitalized companies. “Regulation typically comes with higher costs and higher barriers to entry,” says Eric Sheridan, senior equity research analyst covering the U.S. internet sector. --------------------------------------------------------------- Quoted at GS “All contemporary art, or art being produced today, is really a lens or a mirror that shows who we are in a given moment.” — Sotheby's CEO Charles Stewart joins Kim Posnett, global head of Investment Banking Services and co-head of One Goldman Sachs, on [Goldman Sachs Talks]( to discuss the evolution of art and how digital technologies such as blockchain and AI are advancing the auction market for fine art, jewelry and collectibles. Kim Posnett of Goldman Sachs and Sotheby's Charles Stewart --------------------------------------------------------------- Briefings Brainteaser: Which asset has been worth the risk? The Sharpe ratio measures an asset's return against how volatile those returns have been — or the risk-adjusted return of the asset. Which of the following has the highest risk-adjusted returns in the U.S. this year (through June 7)? A) Information technology stocks B) Bitcoin C) 10-year U.S. Treasuries D) Communication services stocks [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [CNBC]( June 6 [Here's why Goldman Sachs cut recession probability from 35% to 25% (3:11)]( [Bloomberg]( June 4 [Is the AI trade getting too crowded? (3:46)]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. 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