The ‘strong foundation' of the tech-driven S&P 500 rally

How great investors handle market uncertainty # # --------------------------------------------------------------- The key takeaways today: - The 'strong foundation' of the tech rally - Dimensional's David Booth on how great investors manage market uncertainty - How the election super cycle might affect the global economy - Quoted at GS: A robust appetite for risk assets - The market for humanoid robots - Briefings Brainteaser: How do Fed moves affect commodity prices? Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- The tech-driven rally is built on a 'strong foundation' The incredible US tech rally is built on sustainable and enduring fundamentals, [according to Peter Callahan, a sector specialist]( within Goldman Sachs Global Banking & Markets. The Magnificent Seven tech stocks have been a huge part of the S&P 500's recent rally. Since the start of 2023, these stocks are up about 90%, while the other 493 stocks are up just 18%. At this point, “it's natural to wonder if these stocks are overvalued,” Callahan acknowledges. “Some investors even hear echoes of the dotcom bubble.” But he sees it differently. “These seven stocks are capitalizing on one of the most exciting technologies in history: the rise of generative AI.” While AI has boosted investor sentiment, it has also translated into real revenue and earnings growth. For the fourth quarter, the Magnificent Seven reported revenues that rose 15% year over year, and annual sales growth of 12% is expected through 2026. “This rally has been built on a strong foundation,” Callahan says. “And I expect it to continue.” --------------------------------------------------------------- Dimensional's David Booth on being an index pioneer and investing during uncertainty David Booth, founder and chairman of Dimensional Fund Advisors (L) and Raj Mahajan, head of Goldman Sachs' systematic client business David Booth, the founder and chairman of Dimensional Fund Advisors, says the best way to manage a fund during market uncertainty is by giving up on trying to make any predictions at all. “We still think, for most people, the best way to start to think about investing is to approach the idea that the market's not predictable,” he says [on Goldman Sachs Exchanges: Great Investors](. Booth, who founded Dimensional in 1981 from his spare bedroom in Brooklyn Heights, has spent his entire career applying the groundbreaking financial theory and research that he learned at the University of Chicago (where the business school now bears his name) to the world of asset management. Based on research by his former Chicago professor Eugene Fama — who believed that markets are efficient and stock prices reflect all available information — Dimensional runs index-like funds with a long-term horizon. But there are also some key differences. “We engineer portfolios [that] we think are structured towards parts of the market that have higher expected returns. Not short-term movements, but just long-term, higher expected returns,” he says in a conversation moderated by Raj Mahajan, head of Goldman Sachs' systematic client business. “And then we take this idea of 'Flexibility has value' and say we think we can add value or indexing by trading better.” Today, Dimensional manages approximately $680 billion in assets, and it's the largest active ETF issuer after just three years of launching its first ETF. It has had five Nobel laureates on its board of directors. Going forward, Booth expects costs to decline across the asset management industry, a trend he believes will ultimately benefit smaller clients. “I think a lot of the innovation is going to come about because of administrative costs and technology being better, cheaper, faster,” he says. “If we can get closer to mainstream people, the more benefit we can provide.” --------------------------------------------------------------- How the election super cycle will likely ripple through the global economy Major elections in the US, the euro area, the UK, and dozens of other countries mean that a record share of the world's population will vote this year. As people head to the polls, Goldman Sachs Research finds that, in the runup to election day, [government spending tends to increase]( central banking policies tend to ease, and economic uncertainty drifts higher. “Elections will therefore be an important, if not the most important, macro story in 2024,” Goldman Sachs economist Joseph Briggs writes in the team's report. Our economists' analysis of more than 1,100 elections in 152 developed and emerging markets suggests that primary fiscal balances as a share of GDP decline by about 0.4 percentage points on average during election years, reflecting both spending increases and revenue declines. The extent of fiscal easing tends to vary depending on a country's level of income, whether it has a democratic system, and whether the majority party has full control of the lawmaking process. Monetary policy also tends to ease during election years. Across the board, our economists find that policy rates decline by 20 to 25 basis points more than would be explained by other economic factors. But again, countries with central banks that score higher than average for independence show no statistically significant effect on policy rates, according to the research. This suggests that the Federal Reserve and other developed-market central banks — which generally score as highly independent — are unlikely to adjust policy in response to election considerations. --------------------------------------------------------------- Quoted at GS “The market for risk assets is as strong as we've seen in the last two years.” — Vivek Bantwal, co-head of the Global Financing Group in Goldman Sachs Global Banking & Markets, in [an episode of The Insight]( Vivek Bantwal of Goldman Sachs Global Banking & Markets' Global Financing Group Bantwal points out that US high-yield corporate bonds and leveraged loans rallied 14% last year. The conversation in the markets community has shifted from recession risk and central bank rate hikes to expectations for a soft landing and rate cuts. Private equity firms, meanwhile, have been relatively quiet in terms of new activity over the last two years. They have a backlog of private companies they'd like to see go public, as the IPO markets continue to reopen. While it will take time, Bantwal expects leveraged buyouts to increase as well. Market data is sourced from Goldman Sachs Research. --------------------------------------------------------------- The market for humanoid robots may grow faster than expected Will robots become the next smartphones? The worldwide market for humanoid robots is forecast to be bigger than analysts in Goldman Sachs Research expected even a year ago. The prospects for machines that help with everything from folding laundry to handling hazardous waste have improved as progress in artificial intelligence accelerates and investment in the sector grows faster than expected. The total addressable market for humanoid robots [is now projected to reach $38 billion by 2035]( up more than sixfold from [a previous projection]( of $6 billion, Goldman Sachs Research analyst Jacqueline Du writes in the team's report. Their estimate for robot shipments increased fourfold, to 1.4 million units, over the same time frame, with a much faster path to profitability on a 40% reduction in the cost of materials. “AI progress surprised us the most,” the team writes in the report, referring to advances such as robotic large language models (LLMs) — a key reason for the forecast change. Goldman Sachs Research points out that there's been significant progress in end-to-end AI, through which models can train themselves, removing the need for a human engineer to code everything by hand. That's speeding up robot development, allowing these devices to do more tasks and adapt to new situations more quickly. --------------------------------------------------------------- Briefings Brainteaser: The influential Fed Recently, commodities have closely followed the swings in market pricing of Federal Reserve rate cuts. Using data beginning in 1990, Goldman Sachs Research calculated the average, immediate commodity price increases resulting from 100 basis points of easing from Fed rate cuts. Which of these commodities or products showed the largest price increase following such rate cuts? A) Livestock B) Natural gas C) Gold D) Copper [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news By clicking on these links, you will redirected to external websites that Goldman Sachs does not own or operate. Goldman Sachs is not responsible for the products, services, or content provided on those sites. Please refer to each external website's terms, privacy and security policies for details. [Bloomberg]( February 26 Goldman Sachs remains ‘overweight' Japan, South Korea, India stocks (5:12) [Axios]( February 28 Exclusive: Goldman Sachs reaches 15,000 small businesses --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The opinions and views expressed in this newsletter may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. 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