Markets

US Treasuries — typically seen as a haven during market turmoil — recently sold off when changes in US tariff policy caused financial market stress to jump. The decline in the world’s reserve asset during an episode of elevated volatility comes as investors are increasingly focused on the US’s growing debt burden and other countries are also increasing their borrowing. “Markets are dealing with a lot of competing factors right now — fairly significant drivers where it’s hard to trade all of them at once,” says William Marshall, head of US rates strategy in Goldman Sachs Research. Marshall points to a host of drivers that could have contributed to the recent weakness in the price of Treasuries, including concerns about demand for US government debt, fiscal considerations, and hedge funds selling their Treasuries as they unwind leveraged trades. More generally, the impact of tariff policies could complicate the case for owning Treasuries as a hedge against volatility, given the possibility that tariffs could drive down growth while boosting inflation, Marshall points out. In environments with potentially high inflation, Treasury yields typically rise (and prices fall) in order to compensate investors for the risk that their money will be worth less upon the bonds’ maturity. “Yes, we are worried about growth downside risks. But that’s in the context of the potential for very high inflation. Growth and inflation moving in opposite directions erodes some of that hedging property, which makes things a little bit more complicated. So if you’re a multi-asset investor thinking about Treasuries in a portfolio context, their value is perhaps a little bit less clear cut,” Marshall says. At the same time, the market’s focus on the implications of tariffs for US borrowing has shifted in recent weeks. Whereas investors had been focused on how much money tariffs could raise for the US budget (and therefore a potential reduction in the supply of government debt), they now seem to be more concerned about the prospect of a downturn, which could lead to higher government borrowing due to lower tax receipts and increased spending needs. This has been reflected in Goldman Sachs Research’s Treasury convenience factor, which measures the relative valuation of Treasuries versus alternative forms of duration such as swaps or other sovereign bond markets. A lower convenience yield usually reflects a less favorable supply/demand balance for US Treasuries (or investors anticipating a shift in that direction). The Treasury convenience yield fell sharply in April as trade tensions between the US and some of its biggest trading partners increased. Are Treasuries losing support from foreign investors? In addition to fiscal considerations, Marshall says, some market participants have voiced the concern that tensions surrounding tariffs might be causing investors to sell Treasuries. “This broad-based approach that we saw in terms of tariff policy introduced real concern that foreign investors might meaningfully pull back their support for Treasuries in aggregate,” he says. Marshall points out that foreign investors own around 30% of the Treasury market. “But there isn’t a lot of evidence to suggest that there was active selling from the foreign official sector — the central banks that might be relatively sensitive to these shifting political tides,” he adds. Over the longer term, however, Marshall doesn’t rule out the potential for diversification away from dollar assets. “Dollar assets have held a pretty privileged place in the global ecosystem. And so the idea that the events of the past few months potentially dent that position to some extent is, I think, a reasonable concern to have.” What are the global factors to consider in the context of recent Treasury volatility? The recent signs of weakness in Treasuries have implications for other sovereign debt markets. “We’ve seen large swings across G10 rates recently, with some correlation at times to what’s going on in the US — though not quite as consistent,” Marshall says. “Given these cross currents, I think it’s useful to bear in mind that where the US is looking at potentially a very large inflation hit coupled with meaningful growth downside risks, outside the US, the balance skews a little bit more to the growth side of things,” he adds. This could mean that the case for government debt as a hedge against volatility is somewhat stronger in non-US developed markets. Another important consideration is the borrowing and fiscal support announced by other governments in response to geopolitical risks and the economic situation. European governments have unveiled plans to raise defense spending, which Goldman Sachs economists say will lead to higher borrowing and GDP growth. “In terms of deficit as a share of GDP, you can make the argument that the US picture is going to remain somewhat stable at high levels, but beyond the US, the direction of travel is towards slightly larger deficits,” Marshall says. Globally, this is likely to mean an increased supply of safe assets in the coming years, which could have knock-on effects for the Treasury market. Is volatility in Treasuries here to stay? Looking at the three main factors that may have driven the recent weakness in Treasuries — concerns about the path of the US economy, a reassessment of the implications of tariffs for US debt, and a possible shift away from dollar assets — Marshall concludes that the Treasury market may be past the local peak point of concern. But he adds that all three shocks could remain drivers of uncertainty in the market for some time to come. While the 90-day delay of reciprocal tariffs allays concerns of a more severe tariff scenario in the near term, “you still have 10% tariffs across most trading partners and a significant increase for China, which is more than most investors had pencilled in at the beginning of the year,” Marshall says. Similarly, the tension between growth and inflation in the US economy has not been resolved, the question of whether foreign investors are diversifying away from dollar assets is likely to persist, and environments of episodic concern about fiscal sustainability may be

Download Video Transcript Should investors turn to European equities? Sharon Bell of Goldman Sachs Research separates the signal from the noise. This episode was recorded on April 29, 2025.

  Download Transcript What’s driving the US bond market now – and are there opportunities in Treasuries and in credit? Lindsay Rosner, head of multi-sector investing with Goldman Sachs Asset Management, discusses with Chris Hussey.  This episode was recorded on April 29, 2025.

 Subscribe wherever you get podcastsDownload Transcript As the US economy faces a stagflationary shock, how will the Fed navigate this tricky environment? Rob Kaplan, the Vice Chairman of Goldman Sachs and the former president of the Dallas Fed, shares his perspective on how monetary policymakers will navigate slower growth and stickier prices. This episode was recorded on May 1, 2025.

Private credit can be a defensive asset class for investors’ portfolios, offering stability when uncertainty is increasing in the markets and the economy, according to James Reynolds, co-head of private credit for Goldman Sachs Asset Management. The regular cash distributions that flow to investors can help to make private credit funds attractive when other assets may appear more vulnerable, Reynolds says on a Goldman Sachs Exchanges podcast. Investors “see private credit as being a good hedge against potential inflation as well, given that most of what we do when we lend to a borrower is exposed to a floating rate.” Private credit loan portfolios tend to be relatively defensive, Reynolds adds. Lenders in the private markets are less likely to make loans to cyclical companies that are often more heavily impacted during volatile periods. There is less exposure to commodities in private credit than there is in the public high yield market, for example. And while private credit mostly lends to smaller, middle-market companies, they aren’t lower quality. A lot of private credit investing is focused on market leaders with pricing power and strong cash flows, Reynolds says. At Goldman Sachs, this includes software services, certain parts of the healthcare industry, and other businesses that may be more insulated against a downturn. Reynolds points out that Goldman Sachs has had a private credit business since 1996 and the business has navigated multiple market cycles during that time.  While private credit is a relatively young market, it has grown quickly in the past decade and a half and now has about $2.1 trillion in assets under management. Its attraction as a place to invest during periods of volatility in public markets can be seen in the continued strong interest that pension funds, insurance companies, and sovereign wealth funds are showing in the asset class today, Reynolds says.   Private credit amid rising market stress To be sure, the biggest part of the private credit market, direct lending, is a form of leveraged finance, and losses and defaults can be expected to rise when the economy faces strain or the prospect of a recession. Still, direct lending may have certain advantages when losses rise. There’s more flexibility in private credit relationships, and reduced friction, which can help to reduce costs in bankruptcy situations or facilitate coordination among creditors in a loan workout. Reynolds points out that most private credit is senior lending, often characterized by more cautious underwriting. Senior direct lending sits at the top of the capital structure, meaning those creditors are the first to be repaid in a default, making it less vulnerable in periods of greater economic stress. Aside from the positives for investors, private credit can also offer advantages for borrowers, as well as lenders, when markets are fluctuating. Perhaps a private equity owner needs to borrow to make a smaller acquisition but finds that market volatility has caused banks to make fewer loans. A private credit lender may be in a better position to get the deal done. “That certainty is going to be even more critical,” Reynolds says. Generally, when banks are concerned about uncertainty or volatility and become more hesitant, it creates opportunities for private credit. This became apparent during the regional bank stress in 2023, which resulted in dislocation in the syndicated loan market. That pushed some borrowers toward private credit, which was able to fill a gap and help prevent a credit crunch. If rising trade tensions and other economic shifts restrain the syndicated loan market, that may turn out to be good for private credit. Flexible, creative lending solutions involving junior debt can also be important as markets get more challenging, Reynolds says. Private credit lenders may be able to provide capital to good companies that perhaps need more runway because an initial public offering or other exit has been delayed. “We\’re starting to see an increasing number of situations around the world where our capital can be very helpful to these borrowers,” Reynolds says. The pace of private credit investment The pace of private credit investment picked up last year. Goldman Sachs Asset Management has $130 billion in private credit assets under management, spread among more than 600 positions, making it one of the world’s largest private credit managers. The global private credit platform invested more than two times what it did in 2023, according to Reynolds. This activity was helped by an increase in certain types of M&A activity, including larger companies borrowing to make smaller bolt-on acquisitions. The strong pace of investment continued through the first quarter, Reynolds says.

The Trump Administration’s dramatic tariff moves have upended decades of US trade policy, sparking a rapid reassessment of the US and global economic outlook and a surge in tariff-induced recession fears. What lies ahead for the US economy amid this radical policy shift—and especially the uncertainty around it—is Top of Mind.   Top of MindTariff-induced recession risk Read the Reportdownload Listen to podcast Download Transcript

The S&P 500 may offer a good opportunity for active stock pickers, as company-specific factors take precedence over macro trends in driving returns. The opportunity for active investing comes as Goldman Sachs Research predicts the S&P 500 Index will climb some 6% this year. S&P 500 return dispersion last year registered one of the highest levels on record, meaning there was a considerable gap between the best and worst performers in the index. High single-stock volatility and low correlation within the index also point towards a favorable backdrop for stock pickers, according to David Kostin, chief US equity strategist at Goldman Sachs Research.    Is this a good time to buy single stocks? There are a number of reasons why there could be opportunities for investors who target specific companies rather than investing in broad indexes. Last year\’s S&P 500 dispersion reading of 70 percentage points was the highest since 2007 (outside of recessions). Six out of 11 sectors in the S&P 500 registered above-average return dispersion — the highest being Information Technology at 106 percentage points, while Real Estate was the lowest at 39 percentage points. The jump in dispersion was accompanied by increasing certainty surrounding the economic outlook and the growing importance of debates about themes such as artificial intelligence and the US election, according to Goldman Sachs Research. Another indicator of the high dispersion in the S&P 500 in 2024 is the elevated level of single-stock volatility compared to volatility of the broader index. Over the past three months, the average S&P 500 stock has exhibited 1.7% volatility — more than twice the level of the aggregate index, at 0.8%. An analysis of implied volatility (the market’s expectation for future volatility) on three-month S&P 500 options contracts suggests traders are positioned for this dynamic to continue. In addition to the high level of return dispersion last year, stock correlation within the S&P 500 — a measure of how consistent the movements of stocks are in relation to one another — was near historic lows. This combination of high return dispersion and low stock correlations reflects a market where returns are driven by micro, rather than macro, factors, Kostin writes in the team’s report. Goldman Sachs Research forecasts the S&P 500 Index will rise to 6500 in 2025 (as of February 13). “In a micro-driven market, a high share of the typical stock’s return is explained by company-specific factors, while a macro-driven market means the returns for the typical stock are primarily explained by factors such as beta, sector, size, and valuation,” Kostin writes. Beta measures the volatility of an equity relative to the overall market. Is the less predictable environment here to stay? Recently, 74% of the typical S&P 500 stock’s returns have been driven by fundamental factors rather than macro factors, a significant increase on the average of 58% over the past two decades. Goldman Sachs Research expects this micro-driven environment to persist in 2025, for three reasons: “First, GS economic forecasts point to a healthy growth environment this year. Second, continued AI development and adoption should create differentiation across stocks. Third, elevated policy uncertainty also suggests elevated dispersion,” Kostin writes. The Economic Policy Uncertainty Index — based on newspaper coverage, reports from the Congressional Budget Office, and a survey of economic forecasters — has spiked amid tariff announcements by President Trump and his administration. The index hit 496 at the end of January, one of the highest levels since the Covid pandemic. “Looking ahead, debates over trade, tax, fiscal, and other policies represent potential catalysts for additional return dispersion,” Kostin writes. Which sectors are best for stock pickers? Sectors with high dispersion are attractive for stock pickers: Goldman Sachs Research’s dispersion framework ranks Consumer Discretionary as the sector with the highest dispersion, followed by Information Technology, and Communication Services. More macro-driven sectors such as Real Estate and Utilities have the lowest dispersion scores, indicating less opportunity for stock pickers.

Financial markets have whipsawed amid tariff negotiations between the US and its major trade partners. If the US implements sustained taxes on exports similar to those that have recently been proposed, it would likely cut S&P 500 Index earnings per share by 2-3%, according to Goldman Sachs Research. Beyond the additional 10% tariff on imports from China, the Trump administration has proposed, and since delayed, a 25% tariff on imported goods from Mexico and Canada. Tariffs on the EU have also been suggested. It remains to be seen whether the US will implement substantial export taxes or reach a compromise with its trade partners. Our economists’ baseline tariff forecast (which includes taxes on Chinese exports, but not Mexico and Canada) estimates that the effective US tariff rate could rise by about 4.7 percentage points. If tariffs on Canada and Mexico are implemented, that would raise the effective tariff rate by an additional 5.8 percentage points. How will tariffs impact the S&P 500? For the stock market, every five-percentage-point increase in the US tariff rate is estimated to reduce S&P 500 earnings per share by roughly 1-2%, writes David Kostin, chief US equity strategist at Goldman Sachs Research, in the team’s report. As a result, if sustained, the US tariffs that were recently considered — a 25% tariff on imported goods from Mexico and Canada (energy imports from Canada will be subject to an incremental 10% tariff) and an incremental 10% tariff on imports from China — would reduce Goldman Sachs Research’s S&P 500 EPS forecasts by roughly 2-3%. “If company managements decide to absorb the higher input costs, then profit margins would be squeezed,” Kostin writes. “If companies pass along the higher costs to end customers, then sales volumes may suffer. Firms may try to push back on their suppliers and ask them to absorb part of the cost of the tariff through lower prices.” Tariffs could also potentially drive up the value of the dollar, according to Goldman Sachs Research foreign exchange analysts. A stronger dollar could further weigh on the earnings of S&P 500 companies, which derive 28% of revenues outside the US (although they report less than 1% of revenues explicitly from each of Mexico and Canada). For example, Goldman Sachs Research’s earnings model suggests that, holding all else equal, a 10% increase in the value of the trade-weighted dollar would reduce S&P 500 EPS by roughly 2%. During Trump’s last presidency, the S&P 500 fell by a cumulative total of 5% on days when the US announced tariffs in 2018 and 2019, according to Goldman Sachs Research. It fell by slightly more, a total of 7%, on days when other countries announced retaliatory tariffs. The impact of policy uncertainty on US stocks As well as potentially hitting earnings, tariffs could impact US stocks by causing greater uncertainty. The US Economic Policy Uncertainty Index — based on newspaper coverage, reports from the Congressional Budget Office, and a survey of economic forecasters — has gyrated significantly amid trade uncertainty. Shortly before the announcement of the latest tariffs, the measure jumped to a top percentile reading relative to the last 40 years. All else being equal, Kostin writes, the historical relationship between policy uncertainty and the premium that investors demand from S&P 500 companies in return for holding their stock in times of elevated risk suggests that the recent uncertainty increase will weigh on the value of US stocks. It could reduce the forward 12-month price-to-earnings multiple (a key measurement for a stock’s market value) by around 3%. Kostin also notes that some investors are concerned that tariffs could lead to higher interest rates. High bond yields could weigh on equity valuations, as increasing bond yields make stocks look less attractive. Indeed, the risk of tariffs driving up inflation could cause a short-term increase in yields, particularly on shorter-maturity bonds, according to economists in Goldman Sachs Research. However, they expect that, ultimately, the potential impact of a trade conflict on economic growth would prevent a major increase in long-term yields. Taken together, the models for earnings-per-share and valuations indicate the fair value of the S&P 500 could decline 5% in near term, should sustained US tariffs like those recently discussed take place. A more short-term implementation of tariffs would result in a smaller impact on equity markets.