Goldman Sachs: Global stock market returns will trend moderately, investment opportunities emerging outside of the technology sector.

Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer believes that high valuations, higher interest rates and inflation, as well as a slowdown in global trade expansion, are some of the reasons that may lead to the absolute return of future stock markets being lower than during past structural bull market periods. While the technology sector is likely to continue to be a key driver of positive returns, as benchmark returns tend to moderate, more stock selection opportunities will emerge in a broader range of regions, industries, and styles, and investors may need to look beyond the technology stocks that have been driving the stock market higher in recent years. What is the outlook for global stock market returns? Structural bull markets typically begin with low valuations, but valuation in the credit and bond markets is currently high, especially in the US stock market. While this doesn't necessarily mean that US stocks are in a bubble - high valuations mainly reflect strong fundamentals, including higher profit margins and return on equity (ROE) - investors should expect more modest annual returns. Oppenheimer wrote in a report, "The question investors need to consider is whether the US can sustain its ROE premium compared to other markets." At the same time, the stock market - especially the US stock market - is heavily concentrated in a few large technology companies. Oppenheimer stated, "This may be due to a few large companies successfully dominating specific industries, as we have seen in the US technology industry in recent years." However, higher concentration may pose risks to investors, and due to limited opportunities for diversification through bond exposure, we believe that stock investors should focus on diversification within the technology sector and across industries. How do higher interest rates affect the stock market? In recent major bull markets, interest rates and funding costs have been declining. However, in this cycle, long-term bond yields are rising, as in a world of potentially higher inflation, the value of fixed income is decreasing. Rising government debt levels also push up the returns required by investors to finance deficits. Oppenheimer stated, "Even in Japan, where yields were rising after decades of deflationary pressures, and fiscal spending shifts have led to rising yields in Germany." Falling bond yields have helped propel other major bull markets in the past, and now in a high-interest-rate environment, this suggests that future stock market returns may be lower. How does the retreat of globalization affect financial markets? At the same time, global trade is under pressure. This marks a reversal of the trend towards deeper globalization since the late 1980s. The weakening of global economic integration and the trend of rising tariffs are slowing down global trade growth. Therefore, specialization may become more important. Although higher US tariffs may weaken demand, China may still be a strong competitor due to its economies of scale and cost advantages. This combination will make it more difficult for emerging markets with a high proportion of exports in GDP and many economies in Europe to compete. Oppenheimer stated, "Investors should focus on countries and companies that can achieve specialization and dominate in export markets, especially the services sector, to offset the impact of competition from higher-end Chinese manufacturing." He pointed out that higher tariffs, a weaker dollar, along with more fiscal support and localization, also create investment opportunities for companies that dominate in their domestic markets. Will artificial intelligence drive up stock market returns? As companies race to develop artificial intelligence, this technology may disrupt the labor market and the internet. Goldman Sachs research believes that this will challenge existing business models while promoting productivity and the development of new products and services. Oppenheimer wrote, "The tech industry remains a key driver of positive returns for investors, but the range of investment opportunities will expand." For example, Software as a Service (SaaS) companies may use AI tools to boost productivity for businesses. The rapid increase in AI infrastructure may lower barriers to entry for new companies, eroding some existing business models or reducing their expected returns after increasing capital expenditures. There may also be beneficiaries of technological investment growth outside of the United States. Particularly in Europe, investment in the past decade has lagged far behind the US, so investing in technology to replace labor is particularly important. Oppenheimer stated, "With new focus on strategic industries and self-sufficiency, we should see an increase in investment, which may drive profitability and returns in specific areas, from a low base." The importance of physical assets and infrastructure is increasing Over the past 20 years, technology companies and companies focused on intangible investments (such as social media companies) have performed well, especially compared to companies that require large investments in physical capital (such as heavy industry). While Goldman Sachs research still expects strong growth opportunities from technology investments, what is changing is the opportunity to supplement investments in other industry companies. The virtual world and the physical world are converging. Goldman Sachs research expects investors to find opportunities in companies that are poised to benefit from rising capital and investment expenditures, such as AI and data center companies. Oppenheimer pointed out that this can improve portfolio diversification: investors can adopt a "barbell" strategy, investing in high-growth technology companies and companies that will help drive growth. Oppenheimer wrote, "To fully realize the potential of artificial intelligence, we need rapid and meaningful upgrades to physical infrastructure." "Combined with increasing defense spending, decarbonization, and electrification trends, we are seeing a new supercycle of capital spending."