Despite the more than 25% rise in equity markets since late October—largely fueled by a small group of large cap U.S. technology stocks—family offices continue to seek exposure to long-term secular growth trends within a well-diversified portfolio.
Rallies 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 can come with stiff penalties: investors who missed the 50 best S&P 500 trading days since June 2009 would have an annualized return of just 0.70% through December 2023, versus 14.2% for simply remaining invested.
With the S&P 500 trading at around 21 times 2024 earnings, U.S. equity valuations are elevated relative to their global peers. Yet investors focused on growing multi-generational wealth should be mindful of the attributes that make investing in America so attractive.
Beyond being the world’s largest economy with the highest labor productivity, U.S. financial markets provide excellent exposure to secular growth areas and technological innovation, prominently including generative artificial intelligence.
Technology valuations are more elevated than the overall market—the “Magnificent 7” mega-cap names command a roughly 30x multiple on anticipated 2024 earnings. However, investors should consider why this is the case: the Magnificent 7 have strong balance sheets, elevated margins and are expected to generate about 12% annual sales growth over the next three years, against just 3% for the overall market.
While the AI-fueled rally in these names has undeniably been remarkable – with a 28% annualized return since December 2019 – almost all that return (approximately 27%) is attributable to earnings growth (20% in the form of sales growth and 7% in the form of margin expansion).
Family office investors should be prepared to utilize market pullbacks as opportunities to selectively add long-term equity exposure. With uncertainty around interest rates and this year’s election – coupled with over $8 trillion sitting in money market funds—investors should be well-positioned. On a long-term basis, equities have provided enduring growth: in any rolling 20-year period since 1926, they have delivered positive real returns.
Outside the U.S., Japanese equities have been topical as 2023 Q4 earnings growth came in at 32% instead of the 10% expected at the beginning of the earnings season. While we are mindful that Japanese stocks have already rallied significantly, the country’s corporate governance reforms and encouraging transition to a more inflationary environment should provide compelling long-term tailwinds going forward. Additionally, with just 13% of Japanese household capital allocated to equities (versus 40% in the U.S.), the more attractive growth backdrop could lead to an influx of Japanese retail money into the domestic equity market.
In fixed income, with interest rates likely peaked, investors should consider selectively adding duration to their portfolios. With expectations that inflation will continue trending lower to an average of 2.4% this year, which should prompt the US Federal Reserve to start cutting rates in June, 10-year U.S. Treasuries could offer meaningful returns over cash.
Within corporate credit, a tactical overweight is advisable to high yield bonds, where there is more scope for spreads to come in if the economy continues to perform well. Conversely, there may be less value in investment-grade bond spreads, which have retreated to levels last seen in 2021.
Alternative assets have been a longstanding driver of returns and should continue to play meaningful roles in long-term asset allocations. Investors have historically been well-compensated for taking on illiquidity in private markets: top quartile buyout private equity managers have provided a 7% annualized return pickup vs the MSCI World, for example. Investors should “look through” near-term market conditions and implement regular, disciplined commitments to private assets.
Private credit assets have grown significantly since the Global Financial Crisis, most recently due to the equity-like returns achievable in a higher interest rate environment and aided by the elevated spreads private lenders can demand. In addition, the closer relationship between borrower and lender—as compared to the broadly syndicated loan market—may allow for more flexibility and better outcomes for both sides should a borrower struggle to meet their repayment obligations.
A “soft landing” continues to be the most likely backdrop to 2024. Positive momentum should underpin investor sentiment and drive a resurgence in IPO activity, which is already off to a strong start: 2024 IPO issuance is up 53% globally, 225% in the U.S. Private equity should similarly pick up as sponsors grow more confident in public markets as exit mechanisms for portfolio companies.
Since the onset of the pandemic, investors have certainly seen their fair share of asset price volatility across equities, bonds and alternative assets. With the S&P 500 up more than 130% since its March 2020 lows, and bond yields likely to continue normalizing as inflationary pressures subside, keeping cool during times of uncertainty and staying mindful of the merits of diversified portfolios are, in our view, the optimal means of achieving long-term returns for multi-generational investors.
Sara Naison-Tarajano is Global Head of Private Wealth Management Capital Markets for Goldman Sachs and Co-Lead of One Goldman Sachs Family Office Initiative
