Goldman Sachs(US:GS) Goldman Sachs·2025-06-26 14:09Investment Rating - The report suggests a shift towards diversification in investment strategies, moving away from the previously successful concentrated approach in US equities and technology [1][5][18]. Core Insights - The report emphasizes that valuation extremes can persist for extended periods, and the importance of diversification is highlighted due to record high valuation spreads between 'winners' and 'losers' in the market [2][5][18]. - The US equity market has shown unprecedented outperformance over nearly fifteen years, driven by superior fundamental profit growth, particularly in the technology sector [3][5][26]. - Recent trends indicate a potential shift as investors begin to explore cheaper markets outside the US, influenced by a more resilient Chinese economy and changes in German fiscal policy [18][39]. Summary by Sections Section 1: Market Performance - The US market has consistently outperformed other regions over the last decade, with market capitalization reaching significant highs [7][8]. - Investor allocation to US equities is at an all-time high, reflecting a lack of incentive to diversify due to lower expected returns from other markets [9][11]. Section 2: Valuation and Growth - The report notes that the valuation increases in the US were justified by the gap in fundamental growth rates compared to other regions until around 2023 [16][26]. - The PEG ratio between the US and the rest of the world has opened up in recent years, indicating a divergence in growth expectations [20]. Section 3: Currency and Global Investment - The report highlights that currency adjustments make non-US equities more attractive for USD-based investors, contributing to diversification flows [39]. - The dollar has started to weaken, which may lead to further adjustments in investment strategies as US interest rates rise [21][23]. Section 4: Sector and Style Diversification - The report discusses the bifurcation between growth and value sectors, noting that classic value sectors have started to perform strongly alongside growth stocks [49][50]. - There is an emerging opportunity for diversification across different styles and sectors, with a mix of growth and value investments becoming more favorable [50][53]. Section 5: Market Concentration - The concentration risks in global equity portfolios remain high, with a notable increase in market capitalization share among the top 10 companies [42][45]. - Despite strong earnings from dominant companies, the report suggests that the motivation for geographic diversification remains attractive due to the increasing concentration in the US market [45][49].