Diversify US exceptionalism by owning Europe’s GRANOLAS: Goldman Sachs

Investing.com — Long-dated bond yields saw a decline last week, with bonds recovering from the prior week’s sell-off.

Simultaneously, risky assets such as Bitcoin, which surged over 10%, and the S&P 500, with an approximate 3% gain, continued their upward trajectory.

According to Goldman Sachs strategists, markets “have shifted back to pricing a ‘Goldilocks’ backdrop,” ahead of President Donald Trump’s inauguration on January 20 and the potential economic policies that may follow, including tariffs and fiscal measures.

In the currency markets, the Japanese yen rallied due to more hawkish expectations ahead of the Bank of Japan’s monetary policy meeting, where a 25 basis point hike is anticipated. The US dollar has strengthened, particularly against the British pound, which has been impacted by negative macroeconomic surprises.

In the meantime, the US earnings season continues, with Goldman’s US strategists forecasting an 11% growth in earnings per share (EPS), aligning with consensus estimates. Concurrently, the earnings season in Europe has also begun.

Prior to Trump’s inauguration, the “US exceptionalism” was evident across assets. More concretely, the dollar rallied strongly, supported by wider yield differentials and tariff concerns.

US equities hovered near record highs, with their outperformance nearing extreme levels, while US yield differentials against other G10 currencies remained at their widest.

However, with expectations increasingly bullish, “there is a risk of disappointment and some reversal for some of those,” strategists led by Christian Mueller-Glissmann said in a note.

“The probability of S&P 500 drawdown has picked up due to higher valuations, less negative inflation momentum and increased (geo)political uncertainty,” they explained. Should the US continue to experience a reflationary shift with rising bond yields, cyclical assets like the Russell 2000 and non-US equities could be negatively affected.

In this light, Goldman Sachs advocates for a modest pro-risk stance into 2025, with a strategic emphasis on diversification across and within asset classes.

The firm sees potential in European indices and recommends risk reversals to hedge against upside risks outside the US. The GRANOLAS, representing quality European stocks, is highlighted as “an opportunity to diversify US exceptionalism and the Magnificent 7,” strategists concluded.

European stocks were muted on Tuesday, with gains in financial and healthcare sectors offsetting broader declines driven by uncertainty over President Trump’s proposed tariffs after his inauguration.

The pan-European STOXX 600 index stayed flat, remaining close to its three-month highs.