Goldman Sachs and JPMorgan Asset Management have softened their bullish stance a bit. Although the US economic outlook is strong, returns may be ahead of schedule. But real estate, especially the commercial side, could be poised to take off.
Thank you for registering!
Access your favorite topics in a personalized feed on the go. Download the app
By clicking “Sign Up”, you agree to our Terms of Service and Privacy Policy. You can opt-out at any time by visiting our settings page or by clicking “unsubscribe” at the bottom of the email.
Two of Wall Street’s biggest names have become a little skeptical of stocks and bonds, but there may be some attractive opportunities hiding in plain sight.
goldman sachs
Goldman Sachs recently made headlines when it predicted that U.S. stocks would rise only 3% a year over the next 10 years, lower than the average annual rise of 13% over the past 10 years. The company’s rationale is based on a more difficult backdrop, characterized by high valuations, an unusual concentration of market giants, increased recession risk, declining profits and rising interest rates.
goldman sachs
JPMorgan Asset Management (JPMAM) executives are less pessimistic, but agree that the stock may not deliver the returns investors expect.
The firm, which manages $3.5 trillion in assets, expects large-cap U.S. stocks to rise 6.7% annually over the next 10 to 15 years, according to its annual Long-Term Capital Market Assumptions report released Oct. 21. . JPMAM believes global stock prices will rise 7.2% to 8.1% annually over the same period.
Mid-single-digit annual returns for large-cap U.S. stocks are nothing to sneeze at, but they’re down significantly from 7.9% two years ago and 7% last year.
There is a simple explanation for this slightly lukewarm outlook. Because US stocks are falling. And while some bulls are encouraged by the S&P 500’s strong performance, JPMAM strategists are concerned that the market is pulling future gains.
“We posted a little statement near the bottom of all of these pages that said, ‘Past performance is not indicative of future returns.’ “In reality, this is not the case. The strong performance of the past suggests that the environment will be more challenging going forward,” David Kelly, chief global market strategist at JPMAM, said at a press conference for the report. Ta.
The S&P 500 index is on pace to gain at least 10% for the fifth time since 2018 and the 11th time since the financial crisis, including a 22.7% gain in 2024. That strength, combined with an already generous valuation, drove JPMAM. Downgrades long-term outlook for U.S. large-cap stocks.
JP Morgan Asset Management
However, Kelly said the outlook for economic growth was encouraging, so any downward changes would be gradual. Over the long term, the firm calls for U.S. real GDP to reach 2%, the highest since the pandemic, and inflation to 2.4%, the third consecutive year of declines.
Related articles
“The very good news is that we think the fundamentals of the U.S. economy and the global economy are in better shape than they were a year ago,” Kelly said. “Some of the significant concerns about inflation have been overcome. Economic growth looks pretty solid.”
JP Morgan Asset Management
If the 60/40 portfolio loses momentum, real estate could take over the baton
Lower equity returns are expected to drag down traditional 60/40 stock/bond portfolios, which JPMAM currently says should return 6.4% annually over the next decade or so.
This forecast is down from 7% last year and 7.2% heading into 2023, but higher than the 4.3% mark in late 2021, with U.S. large-cap stocks rising only 4.1% annually over the long term. It was expected that he wouldn’t. The early pandemic sucked.
The outlook for bonds, which make up the second half of this calculation, is solid but unspectacular.
Long-term yields on U.S. bonds are generally expected to be 4.6%, down from 5.1% last year and the same level two years ago, while the yield on 10-year U.S. Treasuries is expected to be 4.2%. (4.6% last year, 4.6% last year). % 2 years ago. Meanwhile, high-yield bonds are expected to rise 6.1% over the long term, up from 6.5% last year and 6.8% the year before.
JPMAM expects a standard 60/40 portfolio to have a long-term return of less than 5% after accounting for inflation, and the same is true for large-cap stocks and bonds. While such returns may satisfy some investors, it takes more than 16 years for investors to double their money.
According to JPMAM, those looking for more attractive investment opportunities should consider real estate. Unlike stocks and bonds, the firm’s expected return on that asset class has risen steadily from 5.7% two years ago to 7.5% in late 2023 to 8.1% this year.
Yields on core U.S. real estate are expected to be close to 6%, up from just over 4% a few years ago and well above the 10-year yield of 4.2%. Real estate isn’t cheap based on the capitalization rate, which shows how much money a property is producing compared to its market value, but JPMAM believes this asset class is an exception compared to other yield-producing investments. I believe it has value.
JP Morgan Asset Management
“If you look at this on a spread basis, real estate looks a little expensive because of the cap rate spread,” David Lebovitz, global market strategist at JPMAM, said at the conference. “But if you look at the all-in yield and consider that as a valuation and a starting point, we are looking at a generational opportunity.”
Monica Isar, global head of multi-asset and portfolio solutions at JPMorgan Private Bank, echoed similar sentiments.
“This is, without a doubt, the greatest opportunity in a generation to invest in real estate,” Issar said at the conference.
Isar said commercial real estate looks particularly attractive. Residential real estate has been strong in recent years, as evidenced by a marked recovery in home prices even as mortgage rates remain elevated, but the pandemic has caused millions of people to lose their jobs. Office buildings have struggled to regain their value since we entered a new era of people working remotely. American.
Demand for commercial space has taken a huge hit as companies downsized their physical footprint or avoided offices altogether. But Issar believes the risk is reflected in the price.
“All we’re reading is discussions about falling prices and empty buildings,” Isar said. “Now is the time for investors to step in, move to attractive pricing and move into asset classes such as non-core real estate.”
Investors can work with JPMAM’s team or bet on commercial real estate’s recovery on their own through publicly traded real estate investment trusts (REITs). JPMAM did not outline specific investments, but Isar suggested several ideas to help investors brainstorm.
“Think about apartment complexes. Think about student housing around campus. Think about cell phone towers and data centers,” Isar said. “This is a new direct real estate modernization that will be very attractive to prospective investors.”
