In 2024, the cross-asset performance pattern from 2023 continues, with the seven giants of US stocks and European bank stocks performing prominently. Bitcoin performed strongly due to Trump's return to the White House, while precious metals like gold performed even better than last year, and the NASDAQ underperformed relatively. Japanese government bonds, the yen, and long-term US treasury bonds had the worst performance, and value stocks once again trailed behind growth stocks.

Looking ahead to 2025, Goldman Sachs believes that global economic growth will remain stable, and inflation will further decrease, with monetary policy continuing to be accommodative. However, due to the diminishing tailwinds from easing inflation, the valuation of risk assets is at a high level, combined with increased policy uncertainty after the US elections, geopolitical risks, and the transition to 're-inflation', which has led to an increase in tail risks. Goldman Sachs previously pointed out that Trump's tariff policy could be the tail risk that global markets need to focus on next year.

In this macro backdrop, Goldman Sachs suggests that investors maintain a moderately risk-seeking stance in asset allocation while keeping a balance in multi-asset investment portfolios.

On Tuesday local time, Goldman Sachs' Christian Mueller-Glissmann strategist team released a research report pointing out that while structural and cyclical macro conditions may continue to support relatively high valuations compared to historical levels, long-term returns may decline. Therefore, Goldman Sachs recommends that investors maintain balance between stocks andIts price has soared to a historic high, closely related to market expectations of interest rate cuts by the Federal Reserve.to combat tail risks next year.

Goldman Sachs believes that high concentration and high valuations are reasons to reduce the weight of US stocks in multi-asset portfolios, focusing on Asian stocks like Japan, short-term government bonds, and dollars, while gold remains the best hedging tool.

The core of investment in 2025 is "balancing against tail risks".

In the view of Goldman Sachs, the core theme of the 2025 asset allocation outlook is "lower returns, higher risks, and more balance."

Against the backdrop of stable global growth, declining inflation, and central bank interest rate cuts, Goldman Sachs recommends that investors maintain a moderate risk appetite. However, due to the reduction of tailwinds brought by alleviating inflation and the high valuations of risk assets, the challenge faced by investors is that the market has already priced in a favorable macro backdrop.

Therefore, Goldman Sachs suggests seeking more balance in multi-asset investment portfolios, particularly through bonds to buffer the growth shocks caused by decreasing inflation. However, once inflation rises again, the increased correlation between stocks and bonds may impact the traditional 60/40 investment portfolio.

In such an environment, Goldman Sachs believes that although stock valuations are nearing historical highs, monetary policy may continue to be accommodative after inflation normalizes, thereby limiting the downside risk to stocks. Additionally, Goldman Sachs believes that selectively investing in physical assets such as TIPS (Treasury Inflation-Protected Securities) and gold is an important diversification tool given heightened fiscal and geopolitical risks.

In light of this, Goldman Sachs recommends five options overlay strategies:

Stock put spreads and CDS (Credit Default Swap) payer spreads are used to correct risks,

S&P 500 Index down/euro/USD down mixed strategy is used to counter re-inflation setbacks.

Gold and USD call options are used to address geopolitical risks,

Put options on assets exposed to emerging markets in asia are used to address tariff risks,

Tail hedging of stocks in european/asian emerging economies.

In summary, goldman sachs recommends investors take a more balanced asset allocation strategy to address potential market volatility and tail risks, that is, "balanced strategy beats tail risks."

Stock market - The year of alpha

Goldman sachs defines the coming year as the "year of alpha", and due to the unusually high market concentration, goldman sachs suggests that investors focus on diversification to improve risk-adjusted returns.

Although the valuation of us stocks is close to the high levels of the late 1990s tech bubble and the end of 2021, goldman sachs believes that as long as macro conditions support, the valuation of us stocks may remain at high levels, with strong GDP growth, continued strength in large technology stocks, and lower corporate tax rates expected to drive the s&p 500 index's roi to 11% next year.

Although the market has already priced in a favorable macro backdrop, goldman sachs' risk appetite indicator shows that market sentiment remains high, which increases the vulnerability to negative growth and interest rate shocks.

In this context, Goldman Sachs recommends that investors maintain a moderately overweight position in the USA, Asia, especially Japan's stock market, while maintaining a neutral stance in the European stock market. Goldman Sachs believes that despite high valuations, strong earnings growth and healthy corporate balance sheets will continue to drive shareholder returns, especially in the USA market.

Goldman Sachs expects global equity to have a price return of 9% and a total return of 11% over the next year, driven primarily by earnings growth rather than valuation expansion.

Due to weak economic activity, tariffs, constrained profit margins, and fluctuating ranges in commodity prices, Goldman Sachs anticipates that the return of the European STOXX 600 index will be only 3% next year.

Government bonds continue to trade with declining interest rates, focusing on short-term bonds and being wary of credit bond defaults.

Over the next year, Goldman Sachs maintains a moderately bullish stance on the government bond market.

The report expects that due to anticipated further rate cuts and a steeper yield curve, government bonds will yield excess returns compared to cash. Goldman Sachs expects major central banks to continue cutting rates, with the exception of the Bank of Japan, and anticipates that by the end of 2025, policy rates will be on average about 125 basis points lower than current levels.

In this context, Goldman Sachs prefers to hold shorter-term bonds as they provide better hedging effects. Additionally, Goldman Sachs believes that TIPS are attractive in multi-asset portfolios because they offer the ability to hedge against inflation risk, and the current inflation risks are not fully reflected in front-end pricing.

In contrast, Goldman Sachs takes a cautious stance on the credit market as valuations remain high. Although credit spreads are very narrow, overall yield remains relatively attractive — with expected total returns slightly above government bonds.

Goldman Sachs predicts that by the end of 2025, the 12-month tracking issuer-weighted default rates of high yield bonds in the usa and europe will approach 3.0% from the current rates of 2.6% and 2.9% respectively.

Commodity - a firm choice for gold?

Goldman Sachs maintains a neutral stance on the commodity market for the coming year and recommends that investors maintain "selective investments" while hedging against tail risks.

The agency forecasts that by the end of 2025, the total return of the Goldman Sachs Commodity Index (GSCI) will be 8% (excluding agriculture and livestock which is 12%).

Goldman Sachs expects Brent crude oil prices to remain in the range of $70-85 per barrel (current level is $72.5 per barrel), and due to potential supply disruptions from iran and the backup capacity and demand risks brought by mid-term tariffs, the risk of oil prices breaking out of this range is increasing.

Goldman Sachs' bullish stance on gold is particularly notable, expecting the gold price to reach $3000 per ounce by the end of 2025, which is 13.3% higher than the current trading price. Goldman Sachs has stated in previous reports that gold is the top trade choice to counter inflation and geopolitical risks, with structural drivers coming from central bank demand and cyclical drivers from the federal reserve's interest rate cuts.

Among basic metals, Goldman Sachs favors copper and aluminum over iron ore, citing that asia's demand is shifting from real estate construction to green energy, and that the supply fundamentals have also changed.

Forex Market - Is the Dollar King?

Lastly, in the exchange rate market, Goldman Sachs believes that the dollar will remain strong next year, and investors should prepare for a 'longer period of a strong dollar.'

The report indicates that although it was previously expected that the dollar would gradually depreciate, it is anticipated to maintain its high valuation for a longer period due to support from the Trump administration's policy mix, including tariff increases and loose fiscal policy.

Goldman Sachs believes that the strength of the dollar could trigger interventions from other countries and occasionally cause fluctuations in the forex market when officials comment on the currency. However, given the combination of macroeconomic policies and current market momentum, Goldman Sachs expects the dollar to continue to strengthen.

We are still in a 'dollar world' because the dollar's 'challengers' find it difficult to present better arguments.