1. Stable global growth
The strategists project that global GDP will rise to 3.6% next year from an expected post-crisis bottom of 3.2% in 2015. This should calm concerns that developed markets are stuck in "secular stagnation," or slow growth with little investment and excess saving.
They wrote that "for investors, the relative stability of the growth outlook for both DM and EM economies should be sufficient to offset concerns about the downside risks implied by this year's slowdown in global manufacturing activity, tightening of US financial conditions and prospective rate hikes by the Fed."
Source: Goldman Sachs
2. Lower inflation, but not by as much as expected
With the unemployment rate at a seven-year low of 5%, inflation is not likely to fall by as much as markets have priced in. That's because labor-market slack is less, and the unemployment rate is dipping to a range that would push inflation higher.
"As US unemployment rates reach our forecast of 4.6%, we expect to see an unwind of the deflation premium that is still priced into rates and inflation markets," the analysts wrote.
"In sharp contrast to the loose intuition that 'low commodity prices are deflationary', commodity-price inflation could easily exceed 20% next year," they forecast.
Source: Goldman Sachs
3. Sustained monetary policy divergence
"While one of the lessons of 2015 is that the Fed will likely be cautious about giving a green light to large and rapid US Dollar appreciation, the resilience of the US economy in the face of the substantial Dollar appreciation since mid-2014 gives us confidence that the Fed will ultimately tolerate further Dollar strength as it tightens policy through 2016," the analysts wrote.
On the other hand, the European Central Bank and the Bank of Japan would still be dovish amid the "fragility of their recoveries."
Source: Goldman Sachs
4. Lower oil prices
US oil inventories are at the highest levels for this time of year in nearly a century, and the risk that they could reach full capacity is growing.
"On current trends, our team does not expect the limits of storage capacity to be reached," the analysts wrote. "But there is always the risk that demand will unexpectedly fall short (or that supply will surprise), at which point the only way to clear the excess supply in the physical market for oil is with sharp price declines."
Source: Goldman Sachs
5. A broad decline in commodity prices, in varying degrees
The rationale here is that supply of CapEx commodities like steel and iron ore is harder to take off the market. The high fixed costs of facilities like mines makes it more expensive to suddenly shut them down, and so producers are more willing to continue producing if there's demand.
But OpEx commodities like shale oil can cheaply be removed and restarted, although that means producers have less incentive to do so.
They wrote: "For 2016, we expect the 'lower for longer' theme for commodity prices to continue, but with the additional 'demand tilt'. Namely, that China's efforts to rebalance demand from investment to consumption should reduce demand for CapEx commodities (such as steel, cement, and iron ore) much more than it reduces demand for OpEx commodities (such as energy and aluminum)."
Source: Goldman Sachs
6. The global savings glut is reversing
The "global savings glut," a term coined by former fed chair Ben Bernanke, was created as oil prices rallied in the late 2000s.
The strategists wrote: "The surges in petrodollar savings in the pre- and post-crisis periods are clearly visible. Equally visible, if less remarked upon, is the recent collapse of petrodollar savings following the collapse of global energy prices. In addition, Exhibit 7 shows the EM FX reserves, too, appear to have peaked (another source of saving cited by Bernanke). In our view, these savings declines are bearish for rates, just as they were arguably bullish for rates during the pre-crisis period."
Source: Goldman Sachs
7. Limited stock market returns
Goldman's price target for the S&P 500 in 2016 is 2,100, implying just a 5% increase from current levels.
"Due to the delayed timing of rate hikes, the downside risk to price-earnings multiples is probably greater this year because the positive growth surprises that would normally accompany rate hikes are arguably behind us. Since our US GDP forecast envisions mild deceleration in 2016, equities and other risky assets will likely bear the brunt of rate hikes without the usual buffer of better growth data."
Source: Goldman Sachs
8. An emerging market slowdown
Oil-producing countries will continue to feel the pinch of low oil prices on their economies.
"But in EMs like Russia and Mexico, where currency depreciation has helped absorb the terms-of-trade shock, the remaining adjustments to government and private-sector balances should be correspondingly less painful," the analysts wrote. "We are more concerned about places with pegged exchange rates (such as Nigeria and Saudi Arabia), where the burden of adjustment falls more squarely on government fiscal balances, domestic households and corporates (and in the limit, the exchange rate peg may itself be at risk)."
Source: Goldman Sachs
9. Low liquidity is the 'new normal'
Bond market liquidity has been a hot topic and concern in markets this year.
"It is difficult to see how these market conditions can improve much in 2016. The trends in post-trade visibility and CDS volumes noted above are unlikely to improve, nor is the regulatory treatment of trading books likely to improve. On the contrary, recent evidence suggests that the burdens of balance sheet restrictions imposed by the new regulatory environment continue to mount. Nor do we see any reason to think regulatory remedies are imminent. We therefore do not have much reason to expect market liquidity conditions will improve in 2016."
Source: Goldman Sachs
10. Corporate earnings may bounce back
Corporate earnings growth plunged during the Great Recession, rebounded from 2010 during the earlier years of the recovery, and are now soft again.
The last time this pattern happened was in the mid-to-late 1990s, and it was followed by a sharp drop. The similarity has some worried about what will happen next.
The analysts wrote: "Indeed, the stable-to-rising rising trend in median margins is one of the more remarkable features of the corporate sector during the post-crisis period. The disappointment is real revenue growth, which has twice experienced a mild 'revenue recession' during the post-crisis period after never having experienced one over the prior 30 years. Thus, assuming margins are maintained, we see ample scope for renewed growth of revenue and earnings via the corporate sector's beta to firming US and global GDP growth."
Source: Goldman Sachs
