2021 was a remarkable year for U.S. financial assets. U.S. equities returned an eye-popping 28.7%, extending their gains since the trough of the global financial crisis to 812%—an outperformance of more than 500 percentage points relative to non-U.S. developed and emerging market equities.
Goldman Sachs' Investment Strategy Group has consistently recommended clients stay invested in equities and strategically allocate a greater portion of their equity portfolios to U.S. stocks for the nearly 13 years that they have been writing these yearly Outlook reports. Yet such outsized returns have led clients and colleagues to ask whether we have finally reached a tipping point where the "stay invested" recommendation has reached the end of its shelf life and the time has arrived to underweight U.S. equities.
In Section I of this report, ISG explains why they believe the recommendation to stay invested remains valid. They focus on valuations, the earnings outlook given the global economic backdrop and the absence of what some have termed "froth" or "irrational exuberance" in U.S. equities based on financial market flows and portfolio positioning.
They compare and contrast the current financial market backdrop to that of the dot-com bubble in order to address a frequently and not unreasonably asked question: are we at the precipice of another major downdraft, like the 49% peak-to-trough drop in equities between March 2000 and October 2002?
They then turn to one- and five-year expected returns and our more opportunistic tactical tilts. Section I concludes with the key risks to this outlook, including the pandemic, inflation, tightening of monetary policy, recession and high-impact geopolitical flare-ups.
This is followed by ISG's outlook for global economies in Section II and forecasts for global financial markets in Section III.
Access ISG's full views and investment recommendations in Outlook 2022: Piloting Through.
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