Despite a more than 25% rise in equity markets since late October – driven largely by a small group of large-cap US tech stocks – family offices continue to seek exposure to longer-term secular growth trends within a well-diversified portfolio.
Increases of this magnitude can understandably lead to investor concerns that a market correction may be on the horizon. But choosing to reduce market exposure based on concerns about a pullback could come with severe penalties: Investors who missed the S&P 500's best 50 trading days since June 2009 would have had an annualized return of just 0.70% to in December 2023, versus 14.2% for simply remaining invested.
With the S&P 500 trading at around 21 times 2024 earnings, US equity valuations are elevated relative to their global peers. However, investors focused on multigenerational wealth growth should be aware of the attributes that make investing in America so attractive.
Beyond being the world's largest economy with the highest labor productivity, US financial markets provide excellent exposure to secular growth areas and technological innovation, notably including generative artificial intelligence.
Tech valuations are more elevated than the overall market — the Magnificent 7 mega-cap names command a multiple of roughly 30 times projected earnings for 2024. However, investors should consider why that is: Magnificent 7 have strong balance sheets, high margins and are expected to generate around 12% annual sales growth over the next three years. versus just 3% for the overall market.
While the AI-driven rally in these names has certainly been outstanding—with an annualized return of 28% since December 2019—almost all of that return (roughly 27%) is attributable to earnings growth (20% in the form of increased sales and 7% in the form of margin expansion).
Family office investors should be prepared to use market pullbacks as opportunities to selectively add long-term equity exposure. With uncertainty surrounding interest rates and this year's election — along with more than $8 trillion in money market funds — investors should be well positioned. On a long-term basis, stocks have provided consistent growth: in every 20-year period since 1926, they have delivered positive real returns.
Outside the US, Japanese stocks have been current as fourth-quarter 2023 earnings growth came in at 32% instead of the 10% expected at the start of earnings season. While we are aware that Japanese stocks have already risen sharply, the country's corporate governance reforms and encouraging transition to a more inflationary environment should provide persuasive long-term headwinds going forward. Moreover, with only 13% of Japanese household capital allocated to stocks (versus 40% in the US), the more attractive growth backdrop could lead to an influx of Japanese retail money into the domestic capital market.
In fixed income, with interest rates likely to have peaked, investors should consider selectively adding duration to their portfolios. With inflation expected to remain lower at an average of 2.4% this year, which should prompt the US Federal Reserve to begin cutting rates in June, US 10-year Treasuries could offer meaningful returns over ready money.
Within corporate credit, a tactical overweight is advisable in high-yield bonds, where there is more room for spread income if the economy continues to perform well. Conversely, there may be less value in investment-grade bond spreads, which have retreated to the first recent levels in 2021.
Alternative assets have been a long-term driver of returns and should continue to play significant roles in long-term asset allocations. Investors have historically been well compensated for taking on illiquidity in private markets: the top quarter private equity buyout managers have delivered a 7% annualized return against MSCI World, for example. Investors must “watch” short-term market conditions and implement regular and disciplined commitments to private assets.
Private credit assets have grown significantly since the Global Financial Crisis, most recently due to the equity-like returns that can be achieved in a higher interest rate environment and aided by the elevated spreads that private lenders can demand. Additionally, the closer relationship between borrower and lender—as opposed to the broader syndicated loan market—can allow for more flexibility and better outcomes for both parties if the borrower struggles to meet its repayment obligations. .
A “soft landing” continues to be the most likely backdrop for 2024. Positive momentum should support investor sentiment and fuel a revival in IPO activity, which is already off to a strong start: IPO Issuance of 2024 is up 53% globally, 225% in US private equity should grow similarly as sponsors grow more confident in public markets as exit mechanisms for portfolio companies.
Since the start of the pandemic, investors have certainly seen their fair share of asset price volatility in stocks, bonds and alternative assets. With the S&P 500 up more than 130% since March 2020 lows, and bond yields are likely to continue to normalize as inflationary pressures ease, staying calm during periods of uncertainty and remaining aware of the merits of diversified portfolios are, in our opinion, optimal. the means to achieve long-term returns for multi-generational investors.
Sara Naison-Tarajano is Global Head of Capital Markets of Private Wealth Management for Goldman Sachs and Co-Leader of the Goldman Sachs One Family Office Initiative