Goldman Sachs Strategist Sees Broadening Market Returns, Favors Diversification Amid AI Hype

The current market rally, driven by AI optimism and the prospect of a soft landing, has likely priced in much of the positive news, according to Peter Oppenheimer, Chief Global Equity Strategist at Goldman Sachs. Speaking on Bloomberg Surveillance, he suggested that while the cyclical backdrop for stocks remains positive, particularly with anticipated interest rate cuts, investors shouldn't expect significant gains at the index level. "The setup is positive, but at the index level, we don't expect to see huge rises," Oppenheimer stated, advocating for diversification and broader returns to improve risk-adjusted performance.

Oppenheimer addressed the AI frenzy, acknowledging the potential for productivity gains but cautioning against overestimating further gains for the dominant AI players. These companies, already highly concentrated in the US market, are now investing heavily in capital expenditures, potentially moderating their future growth. He argued that if AI's impact is truly revolutionary, other sectors will also benefit, leading to a broadening of market returns. This broadening, he added, presents an opportunity for diversification away from concentrated US market positions.

He suggests exploring mid- and small-cap companies that may benefit from the AI investments of larger firms. "There are certainly companies within the next level down of size that should benefit because they're either contributing or... will generate new products and services," he noted, drawing parallels to the internet boom of the late 1990s. He also highlighted the crucial link between large-cap tech and the infrastructure/energy sectors, arguing that tech giants’ ambitious growth will necessitate "huge amounts of increased energy production, more electrification," potentially boosting sectors lagging in the recent rally.

Oppenheimer also addressed the potential impact of a second Trump administration. While acknowledging the positive sentiment priced into the market, he noted the potential downside of tariffs, particularly for Europe and Asia. He expects more targeted tariffs on the auto sector in Europe, which he believes is already priced in. However, he also highlighted the global nature of many European companies, suggesting potential opportunities for selective investment in undervalued companies with significant US exposure. Oppenheimer sees potential in Southern Europe, which is performing relatively well compared to the politically paralyzed core of Europe, like France and Germany.

While expecting the US market to generally outperform Europe, Oppenheimer believes selective areas within Europe will perform well, aided by quicker interest rate cuts, a weak currency, and specific pockets of value. He emphasized the importance of looking beyond indices and individual countries to identify global value and growth opportunities.

He also noted the changing interest rate environment. "We're coming out of a decade or more of unusually low inflation," Oppenheimer observed, adding that while interest rates are likely to come down, "[we are] not going back to the levels we were seeing previously."