The outlook for deals in 2024

How private equity strategies are evolving  # # --------------------------------------------------------------- The key takeaways today: - A promising outlook for dealmaking and IPOs in 2024 - Stocks in the US and Japan are expected to rally - The new private equity playbook for an era of higher-for-longer rates - Briefings brainteaser: How does the S&P 500 fare in election years? Was this newsletter forwarded to you? ([Sign up now.]( --------------------------------------------------------------- What's the outlook for dealmaking, corporate and investor sentiment, and markets? Despite a challenging global economy and geopolitical landscape, the outlook for dealmaking, IPOs, and corporate and investor activity is expected to improve in 2024, according to Jim Esposito, Dan Dees, and Ashok Varadhan, the co-heads of Goldman Sachs' Global Banking & Markets business, on [Goldman Sachs Exchanges](. For one, the market for IPOs, which started to pick up in recent months, should accelerate in the back half of 2024, especially if the Federal Reserve starts cutting rates next year, says Dees. “When you step back even further, I think the environment for capital raising will be very robust because it has to be in the years ahead,” he says. “We are in the age of innovation, of accelerating innovation. All that innovation needs to be funded.” M&A activity should also improve. While private equity's dealmaking velocity is expected to slow with the rise in interest rates, companies are starting to step up their strategic activity, says Esposito. “I think corporates in some places were getting priced out of the market, and I do expect to see corporates starting to step in and fill the void,” he says. “We do expect to see a reasonable pickup in dealmaking activity, especially now that we seem to be through the other side of this interest rate hiking cycle.” However, what's different about the current market cycle is the long-term debt dynamic, says Varadhan. Long-term yields have risen at a time when some buyers for that debt are pulling back. “It's hard to see long-term rates coming down meaningfully. Our base case on the trading desk is we expect a more normalized yield curve, a steeper yield curve, but really more with normalized and lower rates in the front end and not a lot of relief in the back end,” says Varadhan. --------------------------------------------------------------- US and Japanese stocks are expected to rally in 2024 [US stocks are forecast by Goldman Sachs Research to have a modest return next year]( as above-consensus economic growth is partly offset by high valuations. - The S&P 500 index is expected to rise to 4,700 by the end of 2024, representing a price gain of about 5% and a total return of around 6% including dividends. Our economists' [forecast for US GDP growth]( in 2024 is already reflected in stock prices. - Cash, with a 5% risk-free return, remains a competitive alternative to stocks. Three-month Treasury bills yield around 5.5%, similar to the earnings yield of the S&P 500 index. - Our analysts think there may be investment opportunities beneath the surface. "Quality" stocks — with higher profitability, stronger balance sheets, and stable sales and earnings growth — could outperform in an environment of persistent investor concern about an impending recession. Growth stocks, which have a higher expected growth rate than the rest of the market, may be attractive given stable economic growth and interest rates. Lagging cyclical stocks that are sensitive to a downturn may rally, given our economists' prediction that recession risk is lower than feared. While US stocks may struggle to beat cash, Goldman Sachs Research forecasts that [the Japanese equity market will have a transformational year in 2024]( boosted by solid global economic growth and stock market reforms. - The TOPIX is projected to rise about 13% to 2,650 by the end of 2024. Japanese companies' earnings momentum also remains strong, Goldman Sachs Research strategists Bruce Kirk and Kazunori Tatebe write in the team's report.  - They forecast 12% growth in TOPIX earnings per share in 2023, 8% in fiscal year 2024, and 7% in fiscal year 2025. - A key part of our analysts' forecast is the Tokyo Stock Exchange's corporate governance reforms, which they say “have been a game changer for the Japanese equities market.” --------------------------------------------------------------- How private equity strategies are changing amid higher-for-longer rates As changes in everything from technology and interest rates to sustainability concerns ripple through the corporate world, private equity enjoys some advantages over public-market investing when it comes to large-scale transformation for the modern economy. But [private equity's playbook will likely be quite different than in the past, according to Goldman Sachs Asset Management](  - Private equity general partners have adapted over the past 40 years to emphasize different return drivers, [write James Gelfer and Juliana Hadas, in Portfolio Solutions for Alternatives Capital Markets and Strategy, in a report](. Leverage and financial structuring have become less important, while multiple expansion and operational factors have gained prominence. - The next era is expected to be defined by slower economic growth, shrinking labor forces, and higher inflation — leaving investors and operators to contend with headwinds to topline real growth, margin compression, and a structurally higher cost of capital. - For private equity, operational value-creation levers — revenue growth and margin expansion — are poised to become the main determinants of success in the new regime. While M&A may be more challenging, organic growth may be more important. Margin enhancement is likely to rely on optimizing processes, enhancing supply chains, and rationalizing the cost structure. - New technology tools could be especially valuable for businesses and industries that are performing well but below potential. But “cautionary tales abound of companies that spent heavily on technology without reaping the full benefits due to organizational frictions,” Gelfer and Hadas point out. --------------------------------------------------------------- Briefings Brainteaser: Election-year returns Since 1976, the S&P 500 Index of US stocks has registered an average annual return of 11%. How much has the S&P 500 returned, on average, in the 12 presidential-election years during that period? A) 4% B) 8% C) 12% D) 15% [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [CNBC]( November 12 [Korea, Taiwan, and Vietnam will continue to benefit from tech exports pickup in 2024: Goldman Sachs (4:02)]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. 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. 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