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Falling inflation, manufacturing upswing to broaden stock rally, Goldman says


Investors may soon benefit from abandoning risk-averse strategies and taking up more pro-risk strategies instead, due to a switch in the global economy that could give a short term boost to cyclical equities, FX, and non-U.S. stocks, analysts at Goldman Sachs said. 

In a note, Goldman Sachs analysts led by Kamakshya Trivedi said the combination of a slowdown in U.S. inflation and upswing in the global manufacturing sector could create a more “risk-supportive” investment environment. 

This “risk-supportive” environment would boost companies whose performances are strongly linked to the state of the global economy, such as luxury goods sellers, car manufacturers, house builders, airlines, and semiconductor makers. 

Stocks in small capitalization U.S. companies, European companies, and companies based in emerging markets outside of China could also be boosted by this more risk friendly environment, due to a possible broadening of economic growth outside the U.S. 

“Relief of US inflation fears and better global cyclical news are both potentially ‘risk-supportive’. If they occur together, they could create a short-term tailwind for cyclical equities and FX, and for non-US equity markets,” Goldman’s analysts said. 

They explained that while markets started scaling back their expectations for interest rate cuts in 2024, following publication of higher-than-expected U.S. inflation data, Goldman’s economics team expects inflation will continue falling throughout the year. 

The analysts also pointed to strong January purchasing manager surveys and indications manufacturers have now started winding down inventories that they built up in COVID-19, as signs of an upturn in the global manufacturing sector, driven by supportive financial conditions and strong spending in the U.S. economy.  

“We continue to believe in the twin pillars of resilient US growth and declining global inflation. Despite higher market levels, those forces should remain tailwinds for risk assets,” the analysts added. 

Goldman’s analysts noted that this boost could extend to global markets, as they noted European markets have made strong gains this year, even without receiving a boost from artificial intelligence software, while Japan has had the strongest gains in 2024 this year. 

“Over the last month, Europe, Japan and China have all outperformed the SPX and Nasdaq in local currency or USD terms, so there has been more breadth to this move already than the common narrative assumes,” Goldman’s analysts said. 

An improvement in the global manufacturing cycle could boost both G10 country and emerging market currencies, even if the U.S. dollar remains strong, Goldman’s analysts said. 

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