Alexandra Wilson Elizondo, Deputy Chief Investment Officer for Multi Asset Solutions at Goldman Sachs Asset Management, said that the market's "cooling" expectation of the Federal Reserve's interest rate cut next year may mean that the next rise in US stocks will be limited, making it a good time to buy on dips.
The unexpectedly strong US non farm payroll data released last Friday triggered a market repricing of the Federal Reserve's interest rate policy. The latest display of swap contracts shows that investors believe that the possibility of a rate cut in March next year is unlikely, meaning that high interest rates will be maintained for a longer period of time.
Wilson Ellizondo believes that any pullback under this premise will be seen as an illusion, and if the US stock market falls, it will quickly reverse afterwards.
She said in an interview, "If the market falls, it's a good opportunity for rebalancing or buying on dips. It's too early to reduce the risk premium of holding stocks now."
Economists at Goldman Sachs currently predict that the Federal Reserve will cut interest rates twice next year, with the first rate cut scheduled for the third quarter. The bank had previously predicted that the Federal Reserve would only begin its first interest rate cut in December next year, and this time has made a forward adjustment to the timing of the first rate cut, citing a better than expected inflation reduction.
The bank expects economic growth to be accompanied by lower inflation, which should provide support for the market, especially for large cap stocks.
Wilson Elizondo said, "We do believe that in these types of environments, high-quality and large cap stocks often outperform, and although valuations may be higher, we believe there is still room for these stocks to rise."
She said that despite the recent surge in small cap stocks, the bank has not followed suit as these stocks often perform poorly in the later stages of the interest rate cycle.
Finally, regarding the US bond market, Goldman Sachs holds a "cautious and constructive attitude" towards interest rates at the beginning of next year, and expects investors to reallocate funds to the long end of the yield curve. The funds flowing into long-term US Treasury bonds will come from up to $8 trillion in money market funds.
"We believe that a portion of the $8 trillion in money market funds will eventually be transferred to the middle of the curve to build confidence in future cash flows," she said.