Goldman Sachs Research’s foreign exchange team expects the US dollar to weaken next year, which should lift the total return for global stocks by 0.6% when measured in US dollars, according to Oppenheimer. “The timing matters: they expect the depreciation to be frontloaded (over the next 12 months), with a subsequent drift thereafter, implying that currency gains—or losses—may be frontloaded.”
Looking forward, Oppenheimer suggests that investors diversify beyond the US, with a tilt towards emerging markets. “We expect higher nominal GDP growth and structural reforms to favor emerging markets, while artificial intelligence’s long-term benefits should be broad-based rather than confined to US technology stocks.”
Are global stock valuations too high?
Global stock valuations are elevated—roughly 19x forward earnings. Goldman Sachs Research expects this to fall slightly over the decade, which would require earnings to outpace stock price by around 10% cumulatively over the next ten years. This is a conservative stance given the high starting multiple for global stock valuations, Oppenheimer writes.
At first glance, the implied annualized nominal return from global stocks over the next decade appears lower than Goldman Sachs Research’s forecast. A classic cyclically adjusted price-earnings (CAPE) approach, which Oppenheimer describes as “a useful but incomplete predictor” suggests annual returns of below 5%.
“Valuation, however, is not the whole story. While elevated multiples typically signal lower forward returns, we argue that today’s valuations can be partly justified by structurally higher margins and improved return on equity,” Oppenheimer writes.
These advances reflect changes in index composition and efficiency gains, which mitigate the risk of lower returns suggested by the CAPE approach in isolation.
“In other words, valuation remains a headwind, but it does not dominate the outlook.”
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