Investors should be overweight in U.S.-based equities and avoid bonds and foreign and emerging market equities this year, officials said today during the 2024 Goldman Sachs Investment Strategy Group Outlook Media Roundtable.

The firm is anticipating around 6% growth for the S&P 500 this year, with the potential for 13% growth if corporate earnings and other factors exceed expectations.

“Equity returns over the next five years are likely to be lower than this year,” said Brett Nelson, head of tactical asset allocation for the Investment Strategy Group (ISG). “We do think that equities are likely to outperform cash and bonds over the next five years and that is one of the reasons why we are advising clients not to switch out of equities into these other asset classes.”

When it comes to fixed income, investors need to factor in expectations that the Fed will lower interest rates this year, Nelson said.

“As a general rule, we prefer duration over credit,” he said. “We think interest rates are coming down [and] that will help duration. On the other hand, we know that defaults are already very low and likely to normalize a bit this year.”

The firm is recommending that investors only be in one strategic duration benchmark.

‘We acknowledge the fact that bonds have a hedging value in a downside scenario like a recession and in that scenario, cash returns could quickly erode if the Fed ended up having to cut significantly more than we expect this year,” Nelson said.

Goldman estimates that there is a 30% chance of a recession this year, which is down from almost 55% the year before, said Sharmin Mossavar-Rahmani, head of the Investment Strategy Group and chief investment officer of wealth management.

One of the reasons Goldman thinks a recession is possible is because of the inverted yield curve. The firm’s yield curve diffusion index reached 100 more than a year ago and that typically is followed by a recession, Mossavar-Rahmani said.

“We still think there are some issues out there,” she said. “It’s not just the yield curve inversion, but inflation. Even though we have a view of it steadily declining, we just want to keep an eye out for that uncertainty.”

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