The writer is head of asset allocation research at Goldman Sachs Since interest rates started to rise in 2022, investors have been recovering from one of the largest shocks to their portfolios — and to their belief system around multi-asset diversification. The surge in inflation during the recovery from the Covid-19 crisis resulted in one of the largest losses for multi-asset portfolios in more than a century.
Expected equity risk premia — that is, prospective excess returns for equities versus bonds — are at the lower end of their historical range. This can either reflect lingering concerns on inflation or more long-term growth optimism. We think the latter is more likely, in part due to technology revolutions such as generative AI and new weight loss drugs, but also due to the unusually high profitability of the US tech sector.