To this end, global markets, according to Goldman Sachs, are moving into a revolutionary postmodern period that is radically transforming investment strategies and undermining traditional methods that have dominated financial markets for decades. This re-definition of the traditional paradigm, as Peter Oppenheimer, managing director of global equity strategy at Goldman Sachs, sees it, is a radical break with the economic environment that defined the past four-decade cycle.
The classic investment paradigms are disrupted
Peter Oppenheimer, the head of global equity strategy at Goldman Sachs, describes a new age in markets. Individual investors in the equity market who can act swiftly enough to separate winners and losers may win big, whereas the others who will remain with the strategies that worked in the recent past, such as buying and holding an index fund, may not win.
Oppenheimer and colleagues named this new environment, the postmodern cycle, a few years ago. On Wednesday, they posted an update to their first thesis that further explored the way macroeconomic shifts in the global economy might spill over into the stock market, as per MarketWatch.
Four-decade paradigm comes to a halt
The old paradigm, dating back to the early 1980s, was marked by sluggish inflation, declining interest rates, and rising globalization. That generously boosted stocks over the last forty years, although there have been a few hitches on the road, such as supply-side economic reforms and deregulation under President Ronald Reagan. All that has changed due to the supply-chain disruptions caused by the COVID-19 pandemic and the tariff plans of President Trump, according to Oppenheimer.
High valuations are a problem for returns in the future
Increased government debt burdens are likely to continue pushing bond yields high compared to the levels experienced over the years that followed the 2008 financial crisis. Consumer goods and services prices need to rise at an even faster rate than they have previously, and the issue of aging populations may also make the connection between corporate profits and economic growth less simple.
Previously, the highest returns of stocks used to occur after the stocks had low valuations. However, valuations on most popular measures are increasingly strained these days, with European and Asian markets looking cheap in comparison to the U.S, but expensive in comparison to historic averages.
Generally, we feel that it is reasonable to have high valuations, but there is less room to have multiple expansion acts as a significant source of returns. We will require smaller annualized returns at broad index levels than we experienced in the 1945-1968, 1982-2000, and 2009-2022 supercycles, Oppenheimer told MarketWatch in a report.
Stock pickers who are going to beat indexes
That may pose challenges to investors who have preferred large-scale diversified portfolios that track indexes such as the S&P 500. Meanwhile, proficient stock selectors might enjoy a plethora of opportunities to shine as market dynamics continue to grow multifaceted. U.S. information-technology stocks, along with Amazon.com Inc. and Meta Platforms Inc., which are most commonly included in the Big Tech category, have dominated returns in the global equities market over the last few decades.
However, this might change with the onset of the AI revolution, which is only starting to yield fruit, Oppenheimer said. Firms are beginning to use this emerging technology to push their productivity up, and in the near future, the difference between winners and losers on the stock market may become more evident in industries, styles, and regions.
The postmodern market thesis by Goldman Sachs is that investors have to fundamentally re-evaluate their strategies as classical paradigms of globalization, declining inflation, and declining interest rates give way to a more dynamic environment. Winning in this new epoch will probably be a matter of proactive management, geographic diversification, and the capacity to find winners in more differentiated market segments.