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Europe’s major currencies strengthened significantly against the dollar in early 2025 as a worsening US economic outlook caused portfolio investments to diversify towards Europe and the UK relative to the US.  “We think dollar weakness is likely to extend — in large part because US policy shifts, including tariffs, have raised uncertainty and are likely to weigh on US economic growth, corporate earnings, and consumer sentiment,” says Kamakshya Trivedi, head of Global Foreign Exchange, Interest Rates, and Emerging Markets Strategy Research at Goldman Sachs Research. “That combination, alongside the fact that people are over-allocated to US assets, means that there is a shift taking place that benefits other currencies — chiefly the euro, but also the pound,” he adds.  The euro has strengthened 9.8% relative to the US dollar in the year to date (as of May 5). The pound has also gained 6.6% relative to the dollar in the same period. In addition to a rethink of the return and risk prospects of US assets, Trivedi says, the gains in the euro and the pound are likely driven by more optimism about Europe and the UK. In particular, he points to the prospect of higher fiscal spending in Germany following the government’s reform of the country’s debt brake, which prompted our economists to upgrade their growth forecasts for Europe’s economy.  “It’s not just that you’ve had an erosion of US return prospects. It’s also the case that there is more optimism about European fiscal spending and the potential for Europe to provide alternative safe assets that people can invest in,” Trivedi says.  Goldman Sachs Research expects this trend to continue, with the euro forecast to be worth $1.20 and the pound projected to be worth $1.39 in 12 months, up from $1.13 and $1.33 currently (as of April 29).  We spoke with Trivedi about the outlook for the euro and the pound.  How rare is it that a major currency strengthens to this extent against the dollar? The starting point is that we’ve had many years of dollar strength, and so the dollar is quite overvalued on most conventional metrics and has been for many years. But Goldman Sachs Research has long been of the view that the dollar’s overvaluation would persist as long as US equity markets continue to deliver strong returns and US bonds continue to offer a very attractive package of high yield alongside value as a hedge for private-sector portfolios.  The present moment is particularly noteworthy because both of those aspects are being questioned: The lower growth expectations for the US economy are likely to translate into lower company earnings, and people are questioning the return prospects of US equities. Also, some of the unusual correlations that we’ve seen between US equities and bonds has meant that people have been questioning the hedge value of US bonds within multi-asset portfolios.   On the other hand, after many years where flows from within Europe have been allocated to US equities and US bonds, often currency unhedged, we’re now seeing a bit of a reversal where people are more optimistic about the return and earnings prospects in Europe.  At the same time, German and even UK government bonds have actually performed better as hedge instruments through the month of April.   In other words, after many years of US assets being pre-eminent, we’re starting to see a shift. A lot of both European and global investors have huge allocations to the US. That imbalance has been built up over a number of years, and it will take a long time to reverse. This shift is just beginning to happen, and I think it has room to run.  And so, while there has been a large move in the euro versus the dollar, based on Goldman Sachs Research’s metrics, the euro is still a long way away from its fair value.  What’s driving the strengthening of the British pound? In late 2024 and early 2025, we saw the pound strengthening not just against the dollar, but also against the euro. In part, that was because the Bank of England’s rate easing path looked more hawkish than what was likely to play out in Europe. The combination of slightly stickier inflation and growth meant that the Bank of England was proving to be a hawkish outlier. That — alongside relatively resilient economic data — is part of the reason why the pound performed well on a broad basis.  More recently, the euro has been on the front foot. It’s been the primary gainer versus the dollar in recent weeks, but the pound has gained as well.  This also reflects the fact that the UK is somewhat less exposed to trade tensions than many other economies. The UK doesn’t have a particularly large goods trade imbalance with the US. Any exposure that it does have comes more from the fact that it’s an open economy, so it’s exposed to slower growth in the rest of the world, including in the euro area.  What would a recessionary economic outlook for Europe and the UK mean for the euro and the pound? Currencies are a relative asset at the end of the day: It’s not just about what’s happening in one place. For one currency to appreciate, you normally need to see better relative growth and asset market prospects in that part of the world.  And so if the economic data become significantly worse in Europe compared with the rest of the world, I think you would see some correction from the very sharp moves that we have seen in the euro and pound versus the dollar. In general, as global investors are “right-sizing” their exposure to Europe and the UK relative to the US, there’s probably some degree of growth slowdown or bad economic data that investors are willing to stomach. But of course, ultimately it will be about the return prospects of the assets in the region. If Europe can’t deliver stronger growth and better returns, I think that will limit the potential extent

The price of gold has surged more than 40% since the start of January 2024, repeatedly shattering records. Goldman Sachs Research forecasts the rally in gold will continue amid demand from central banks. The price of the precious metal is predicted to climb a further 8% to $3,100 a troy ounce by the end of 2025, analyst Lina Thomas writes in the team’s report. (The team’s previous projection was for gold to rise to $2,890.)   The increased forecast is underpinned by higher-than-expected demand for gold from central banks, which have been increasing their reserves of the commodity since the freezing of Russian central bank assets in 2022, following Russia’s invasion of Ukraine. As well as stronger central bank demand, Goldman Sachs Research anticipates a boost to the gold price from increased purchases of gold ETFs as declining interest rates make gold a more attractive investment. Those factors may be somewhat offset by speculators reducing their net long positions on gold in futures markets, which is projected by Goldman Sachs Research to weigh on the gold price somewhat. Net long positions are currently very high as concerns of sustained tariffs from the Trump administration drive investors towards safe haven assets including gold. But continued uncertainty — whether it’s about tariffs, geopolitical risk, or fears about high government borrowing — could also push speculators to increase their long positions in gold. This scenario would drive the gold price as high as $3,300 per troy ounce by the end of 2025, Thomas writes in the report. Our analysts’ gold price prediction The main driver of the higher forecast is central bank buying, which exceeded expectations in December. Before the freezing of Russian central bank assets in 2022, the average monthly institutional demand on the London over-the-counter gold market stood at 17 tonnes. In December last year, that figure hit 108 tonnes. Thomas estimates that demand from central banks alone on the London OTC gold market increased fivefold following the freezing of Russian central bank assets. As a result, she says, the team has increased the assumption for central bank demand in its gold price forecast. Consistently higher demand from central banks could raise the gold price by as much as 9%, Thomas adds. Goldman Sachs economists also expect the Federal Reserve to cut interest rates twice this year, which should provide an additional lift to the gold price as non-interest-bearing assets start to look more attractive relative to bonds. These two dynamics should outweigh the anticipated drag on the gold price from speculators offloading their unusually high net long positions in the yellow metal on futures markets. Speculators’ net long positions are high because of demand for gold as a safe haven asset — a phenomenon that could be short lived if markets become more certain about the economic and political environment. A return to more normal levels of long positions among speculators could weigh on the gold price in the short term — which could make it a less attractive time for investors to enter the market — but the price is still likely to trend upwards by the end of the year, according to the report. What are the risks to the new price forecast? Several factors could cause the gold price to either undershoot or exceed Goldman Sachs Research’s projection for gold to rise to $3,100 per troy ounce by the end of year. On balance, these risks are to the upside — they are more likely to drive the price higher than forecast. For example, if policy uncertainty remains elevated or sustained concerns about tariffs continue to drive demand for safe haven assets, the team predicts that speculative gold investing could push prices as high as $3,300 by December 2025. “We also see upside risk to our gold price forecast from stronger-than-expected central bank demand on higher US policy uncertainty,” Thomas writes. If purchasing by central banks hits 70 tonnes per month on average, gold prices could climb as high as $3,200 by the end of 2025, she adds. Similarly, an increase in concerns over the trajectory of US government debt could drive central banks with large US Treasury reserves to buy more gold, as well as driving speculative positioning and ETF flows higher, which could provide an additional 5% rise in prices by the end of the year, bringing them to $3,250. Gold prices could fall short of the new forecast if the Fed cuts US interest rates less than our analysts expect. For example, if the Fed keeps rates flat, the team expects the gold price to reach only $3,060 per troy ounce by the end of 2025.

European equity markets have had a strong start to the year, outperforming their peers on the other side of the Atlantic. Even after the rally, Goldman Sachs Research expects European equities to rise as much as 6% in the next 12 months. Strong fourth-quarter corporate earnings, higher defense spending, and a lack of direct tariffs targeting Europe from the US appear to have contributed to the surge in stocks from Paris to Frankfurt. Investors were not positioned for the strong performance, as evidenced by polling from Goldman Sachs conferences: A survey of more than 300 attendees at Goldman Sachs’ Global Strategy Conference in January found that 58% of participants expected US stocks to perform best in 2025. In contrast, only 8% thought that Europe would perform best, making it the least favored developed market. We spoke with Goldman Sachs Research Senior Strategist Sharon Bell about what might be behind the rally in European stocks and her forecast for the rest of this year. How much of Europe’s outperformance this year comes down to low expectations? Investors were very skeptical about Europe going into this year — on the economy, on the impact of Trump policies and tariffs, and on growth. Because markets had already priced in a fairly weak growth profile this year, Europe only had to perform in line with expectations (or slightly better) and it could do very well. The recent strong performance has been driven by proposals from Germany to spend more on infrastructure and defense, and in doing so bypass the restrictions of the debt brake. This is a huge change for Germany and for Europe, which has historically been reluctant to spend to boost growth. In addition, some of the strong performance is because the fourth-quarter company earnings season was reasonably good for Europe. And some of it is also that Europe so far hasn’t been targeted with tariffs by the US. Stocks have also risen because of the growing understanding that Europe will have to spend more on defense: If there’s no peace in Ukraine, Europe spends more on defense; if there is peace in Ukraine, Europe has to ensure that peace and therefore spend more on defense. Either way, Europe spends more on defense, which helps defense companies. How far has the valuation gap between US and European stocks closed? US equities were at extremely high valuations at the beginning of this year. The US market is down a bit, meaning that US valuations have also come down — although they’re still in the 90th percentile of their historical range. Meanwhile, European valuations have increased, and are now above the 50th percentile. Why is that? Because the European market, in absolute terms, has risen 10-12%, and earnings have not gone up — if anything, earnings-per-share estimates for this year are slightly down. The US has gone down a fraction, and Europe’s gone up a fraction. So that elastic band that got stretched very far between US valuations and European valuations has come back in a tiny bit. It’s still very stretched, though — not because Europe is very cheap, but because the US is still near historically high valuations. Is there more room for European stocks to rise? I do still see upside for the remainder of this year: Our 12-month target still has 5-6% upside. But the market’s already up 10-12% since the start of the year, so I feel we’ve already had a lot of the returns on European equities. Markets move in front of data and economic news. The economic news for 2026 and 2027 has got better for Europe: Our economists now expect German real GDP to expand 2% in 2027, mostly because of more government spending. That’s a large change from a flatlining economy in recent years. But the market priced that news in quite quickly. It could be, because markets are volatile, that stocks come down a bit, get to a lower base, and then rally again. I do see a little bit of medium-term upside, because I think we’ll have positive earnings growth for the next few years, but that growth is unlikely to be very strong for Europe. We’ve seen some early signs that could indicate weaker US economic growth. How could that impact European equities? I think part of the sell-off that we’re seeing at the moment in US equities is a reflection of people reassessing the impact of this trade policy uncertainty. And it does look like it’s quite negative so far for the US economy — particularly for the consumer. We’ve seen consumer survey data on inflation expectations zoom up in the US. Around a quarter of European companies’ exposure is to the US. So in the end, if the US economy is not growing as fast as people expect, then Europe won’t export as much to the US. Many of the European companies with direct exposure to the US aren’t really exporters — they don’t produce in Europe and then send over to the US — instead, many of them actually own US businesses or divisions. So in a sense, there’s two ways in which weaker US economic growth would hit European companies: It would affect exporters themselves (and that in turn impacts European GDP), and it would also hit European companies with US businesses. Having said all of that, we still expect reasonably healthy US growth this year. And if growth does weaken further, then with interest rates at the level they are, there’s always potential to soften financial conditions by bringing rates down. We don’t expect a recession in the US, but a slightly softer patch of growth is not so good for European companies, either. What sectors look well positioned for growth in Europe? Defense stocks have done extremely well recently. A basket of European defense stocks is up 67% since the start of this year (as of March 6). But that strong performance is partly based on future expectations. I think those stocks will probably still do well in the

US stocks have been buffeted in recent weeks. Goldman Sachs Research reduced its forecast for the S&P 500 Index to reflect our economists’ estimates for slower GDP expansion, higher tariffs, and an overall uptick in uncertainty. The S&P 500 is expected to rise to 6200 by the end of the year, down from an earlier forecast of 6500. This suggests an increase of about 7% in the price of the index during that period (as of March 25). The team also reduced its forecast for S&P 500 earnings-per-share growth to 7% from 9%. Goldman Sachs Research estimates that the average company in the index will make $262 of profit per share this financial year (compared with $268 previously). “The headwinds to equity valuations from a spike in uncertainty are typically relatively short lived,” Goldman Sachs Research Chief US Equity Strategist David Kostin writes in the team’s report. “However, an outlook for slower growth suggests lower valuations on a more sustained basis,” he says. What’s the outlook for stocks in a recession? Kostin adds that portfolio managers are increasingly asking about the implications of a potential recession on the US equity market. During 12 economic downturns since World War II, the S&P 500 typically declined by 24% from its peak, while earnings dropped by 13% (median peak-to-trough). History shows that short-term peak-to-trough declines in stocks, or drawdowns, are usually good buying opportunities if the economy and earnings continue to grow, according to Goldman Sachs Research. Over the last 40 years, the S&P 500 index has experienced a median yearly drawdown of 10% — that’s in line with this year’s earlier 10% decline. Our economists assign a 20% probability of recession during the next 12 months, slightly above the unconditional historical average of 15%. In contrast, the consensus of economist estimates assigns a 25% likelihood of recession. “The key market risk going forward is a major further deterioration in the economic outlook,” Kostin writes.  What caused the stock market to drop? The immediate causes of the market decline included an increase in policy uncertainty (largely driven by tariffs), concerns about the economic growth outlook, and investors — particularly hedge funds — unwinding their positions. Goldman Sachs Research economists recently revised their expectation for the average US tariff rate, which is now projected to rise around 10 percentage points to 13%. The US stocks team’s rule of thumb is that every five-percentage-point increase in the US tariff rate reduces S&P 500 earnings per share by roughly 1-2%, assuming companies are able to pass through most of the tariffs to consumers. Similarly, early indicators of weaker-than-expected economic activity in the US affect the outlook for the stock market, because weaker economic growth usually translates to weaker corporate earnings growth. Goldman Sachs Research economists recently lowered their forecast for real US GDP growth to 1.7% year-on-year by the end of the 2025 financial year, down from 2.2% previously. The market decline also reflects a major unwind in positioning, especially among hedge funds. Goldman Sach Research’s basket of most-popular stocks among hedge funds has suffered its sharpest period of underperformance relative to the S&P 500 in five years. And more than half of the S&P 500 index’s 10% drop from its all-time high in February came from a selloff of the large US tech companies known as the Magnificent Seven.  Which stocks should investors buy? To protect their portfolios, Kostin’s team suggests that investors favor “insensitive” stocks that are insulated from the major themes driving fluctuations in the markets. For example, investors can screen for the stocks with the lowest recent sensitivity to the equity market’s pricing of US economic growth, trade risk, and artificial intelligence. Additionally, Kostin writes, “investors should consider stocks hammered by the hedge fund positioning unwind that trade at discounted valuations.” In particular, he highlights stocks that are popular with hedge funds that have declined by more than 15% from their highs and trade at or below their three-year median price / earnings multiple. For the stock market to recover, Kostin writes, one of three things needs to happen: An improvement in the outlook for US economic activity, either due to better growth data or more certainty around tariff policy Equity valuations that price economic growth well below Goldman Sachs Research’s baseline forecast Investor positioning falling to depressed levels

Recent declines in US stocks were driven by high investor expectations at the beginning of the year as well as concerns about weaker economic growth and uncertainty created by President Donald Trump’s tariff announcements. Even after the drop, the S&P 500 might be vulnerable to deeper declines, according to Goldman Sachs Research. US stocks fell in early March, with the S&P 500 posting a correction (a drop of 10% or more from peak to trough) as of March 27 after reaching an all-time high on February 19. In spite of the steep selloff, our strategists’ equity drawdown risk model, which forecasts the probability of the S&P 500 falling, suggests US stocks are at risk of further declines. The model has indicated an elevated risk of the equity losses since January. “The equity drawdown probability hasn’t peaked yet,” says Christian Mueller-Glissmann, head of asset allocation research within portfolio strategy for Goldman Sachs Research. The model looks at both macroeconomic and market variables, and those factors do not appear to have reached a point of balance. “As the markets have gone down, the macro backdrop has also deteriorated. And that means that you cannot sound the all-clear at this point. There’s still a risk of the equity correction continuing — even though we do not expect a bear market, as this usually requires a recession,” he adds. But Mueller-Glissmann also notes that the equity drawdown model is unlikely to anticipate changes in policy, such as adjustments to interest-rate policy from central banks. “So if there’s a major policy pivot from President Trump or the Federal Reserve, of course, markets could recover much faster.” Why did US stocks fall? Mueller-Glissmann’s team looks at three different cycles in its analysis of markets: the sentiment cycle, the business cycle, and the structural (economic) cycle. Sentiment has been particularly important in stock markets so far this year. The structural cycle, which describes trends in the wider economy, is often closely linked to the business cycle — the performance of the economy and companies. But sentiment — the attitude of investors towards a certain stock, sector, or market — is often behind short-term market movements. The performance of equity markets has defied the expectations of many investors, both because of the decline in US stocks and because of the relative outperformance of European and Chinese stocks. “This reversal was accelerated and exacerbated by the sentiment going into 2025” Mueller-Glissmann says. “Positioning was very bullish at the beginning of this year with regards to the US. The reverse was true of Europe and China: People were structurally bearish because of headwinds from housing, demographics, and geopolitical concerns in China, and because of political gridlock and lower productivity in Europe.” The correction in the US, meanwhile, has been led by the major large cap technology stocks known as the Magnificent Seven, which have dropped significantly more than the rest of the S&P 500 Index. “That’s important, because the Magnificent Seven are also drivers of confidence for retail investors (i.e. for households). We find that household allocation to equities in the US is the highest ever — even higher than during the tech bubble,” Mueller-Glissmann explains. This means that sentiment in the US equity market might be particularly sensitive to a drop in the value of Magnificent Seven stocks. One way of assessing investor sentiment is by looking at risk appetite as indicated by markets. “What we’ve found historically is that if our risk appetite indicator is very negative, irrespective of what happens in the business cycle, at some point you can buy the dip,” Mueller-Glissmann says. Normally, the risk appetite indicator needs to register close to -2 before investors can expect a reversal in market performance without a change in the momentum of the wider economy or policy support. And while the indicator is currently well above that level, things can change quickly. A good example was during the summer in 2024, when the risk appetite indicator fell to -2 in a matter of days after the start of the equity downdraft, creating a good buying opportunity for investors, who could look for a market recovery shortly after. “Normally, when we have an equity correction, I’m looking either for the risk appetite indicator going to -2 or our equity drawdown risk model — which incorporates macro momentum, policy shifts, and also the risk regime — starting to peak. We don’t have either yet. And that tells us that, in the near term, things could remain quite bumpy,” Mueller-Glissmann says. What’s the outlook for the 60/40 portfolio? At the beginning of the year, when the equity drawdown risk indicator was suggesting an elevated risk of a correction in US stocks, the portfolio strategy team cautioned that investors should diversify portfolios both across and within assets. Diversifying across assets means balancing out equity exposure with bonds; diversifying within assets means investing in equities from non-US markets. But Mueller-Glissmann adds that the 60/40 formula for buy-and-hold portfolios — comprised of 60% equities and 40% bonds — has continued to perform well so far this year. “Equities are down in the US, but bonds have rallied in the year to date. And in Europe, bonds are down, but equities have rallied,” Mueller-Glissmann says. This means that an average portfolio comprised of both assets from either region was diversified enough to keep yielding returns in spite of the volatile start to the year. How to invest amid signs of economic slowdown Historically, it’s unusual for non-US equities to decouple from their US counterparts, Mueller-Glissmann adds. This means that a continued decline in US stocks could start to affect global equities more broadly. “What tends to happen is, maybe on the first instance as US equities sell off for the first 5-10%, European and global equities can outperform, like they have for the last few weeks,” Mueller-Glissmann says. “But then, if US equities go through a larger correction, the rest of the world tends to catch down.” “As a result of that, you now

Recent policy announcements in China highlight new government efforts to raise birth rates. For investors, this suggests an improving outlook among dairy and infant formula companies that have sales in China, according to Goldman Sachs Research. It also creates a positive storyline for companies outside Asia that make ingredients for infant nutrition. The policy developments include a March 13 announcement by leaders in Hohhot, Inner Mongolia’s capital, of child-raising subsidies. The city will offer a one-time payment of RMB 10,000 ($1,383) to help support a family’s first child; provide RMB 10,000 per year up to age five for a second child, for a total of RMB 50,000; and will grant a subsidy of RMB 10,000 per year for 10 years for a third child or additional children. The announced subsidies in Hohhot also included a plan to provide milk to parents for one year after a child is born, through coupons for dairy products worth RMB 3,000. “Hohhot’s initiatives resonate with the government’s recent policy direction,” Goldman Sachs Research analyst Leaf Liu and her colleagues write in a report. How is China attempting to increase birth rates? A few days after Hohhot’s announcement, China’s government unveiled a special action plan that signaled the potential for more childcare subsidies nationwide. The plan reinforced policies to promote consumption that emerged from the annual plenary sessions of the National People’s Congress and the Chinese People’s Political Consultative Conference in Beijing earlier in the month. The subsidies for parents in Hohhot are high compared with similar programs announced in recent years in other Chinese cities, Andrew Tilton, chief Asia Pacific economist and head of Emerging Markets Economic Research, writes in a separate report. The macroeconomic impact will be limited if Hohhot is the only place offering subsidies at that level. Still, Goldman Sachs economists estimate that these types of supports, if implemented nationwide, could add between 0.1 and 0.3 percentage point to annual GDP. Shares of dairy companies that can benefit from these measures in China have risen: A basket of stocks that includes large makers of liquid milk, milk powder, and infant formula rallied more than 7% in just a few days. China’s fertility policy could boost stocks outside China Companies in Europe may also benefit from China’s efforts to boosts birth rates and provide greater support for families with young children, Georgina Fraser, head of the European Chemicals team, writes in a separate report. Policies to increase domestic consumption and enhance citizens’ quality of life could drive more demand for premium and higher-value dairy products. Investors may find opportunities in biotechnology companies that have engineered human milk oligosaccharides (HMOs), a type of carbohydrate that occurs naturally in human breast milk and promotes immune health and gut function. “The commercialization of HMOs is on the back of more favorable regulation,” Fraser writes. By 2030, there may be HMOs in 50% of the infant formula produced worldwide, up from just 5% today, she says in her team’s report. Some European companies make HMOs. Fraser writes that the market for these products could broaden across age groups. “HMOs are increasingly being recognized for supporting immune and gut health for a broader demographic,” Fraser writes. The outlook for demographics in China Births have been falling in China for years, but they rose in 2024. There’s further room for birth rates to rebound, Liu writes. Mothers aged 20 to 24 are estimated to be having children at half the pace they were before the pandemic, and mothers in the 30 to 44 age range have a birth rate notably below levels seen in Japan and South Korea for that age range. As a result, there’s scope for a recovery in birth rates. If policy support for having more children turns out to be significant nationwide, “our population model points to a potential uptick in new births” over the next decade, Liu writes.

Download Video Transcript Should investors turn to European equities? Sharon Bell of Goldman Sachs Research separates the signal from the noise. This episode was recorded on April 29, 2025.

  Download Transcript What’s driving the US bond market now – and are there opportunities in Treasuries and in credit? Lindsay Rosner, head of multi-sector investing with Goldman Sachs Asset Management, discusses with Chris Hussey.  This episode was recorded on April 29, 2025.

 Subscribe wherever you get podcastsDownload Transcript As the US economy faces a stagflationary shock, how will the Fed navigate this tricky environment? Rob Kaplan, the Vice Chairman of Goldman Sachs and the former president of the Dallas Fed, shares his perspective on how monetary policymakers will navigate slower growth and stickier prices. This episode was recorded on May 1, 2025.

Private credit can be a defensive asset class for investors’ portfolios, offering stability when uncertainty is increasing in the markets and the economy, according to James Reynolds, co-head of private credit for Goldman Sachs Asset Management. The regular cash distributions that flow to investors can help to make private credit funds attractive when other assets may appear more vulnerable, Reynolds says on a Goldman Sachs Exchanges podcast. Investors “see private credit as being a good hedge against potential inflation as well, given that most of what we do when we lend to a borrower is exposed to a floating rate.” Private credit loan portfolios tend to be relatively defensive, Reynolds adds. Lenders in the private markets are less likely to make loans to cyclical companies that are often more heavily impacted during volatile periods. There is less exposure to commodities in private credit than there is in the public high yield market, for example. And while private credit mostly lends to smaller, middle-market companies, they aren’t lower quality. A lot of private credit investing is focused on market leaders with pricing power and strong cash flows, Reynolds says. At Goldman Sachs, this includes software services, certain parts of the healthcare industry, and other businesses that may be more insulated against a downturn. Reynolds points out that Goldman Sachs has had a private credit business since 1996 and the business has navigated multiple market cycles during that time.  While private credit is a relatively young market, it has grown quickly in the past decade and a half and now has about $2.1 trillion in assets under management. Its attraction as a place to invest during periods of volatility in public markets can be seen in the continued strong interest that pension funds, insurance companies, and sovereign wealth funds are showing in the asset class today, Reynolds says.   Private credit amid rising market stress To be sure, the biggest part of the private credit market, direct lending, is a form of leveraged finance, and losses and defaults can be expected to rise when the economy faces strain or the prospect of a recession. Still, direct lending may have certain advantages when losses rise. There’s more flexibility in private credit relationships, and reduced friction, which can help to reduce costs in bankruptcy situations or facilitate coordination among creditors in a loan workout. Reynolds points out that most private credit is senior lending, often characterized by more cautious underwriting. Senior direct lending sits at the top of the capital structure, meaning those creditors are the first to be repaid in a default, making it less vulnerable in periods of greater economic stress. Aside from the positives for investors, private credit can also offer advantages for borrowers, as well as lenders, when markets are fluctuating. Perhaps a private equity owner needs to borrow to make a smaller acquisition but finds that market volatility has caused banks to make fewer loans. A private credit lender may be in a better position to get the deal done. “That certainty is going to be even more critical,” Reynolds says. Generally, when banks are concerned about uncertainty or volatility and become more hesitant, it creates opportunities for private credit. This became apparent during the regional bank stress in 2023, which resulted in dislocation in the syndicated loan market. That pushed some borrowers toward private credit, which was able to fill a gap and help prevent a credit crunch. If rising trade tensions and other economic shifts restrain the syndicated loan market, that may turn out to be good for private credit. Flexible, creative lending solutions involving junior debt can also be important as markets get more challenging, Reynolds says. Private credit lenders may be able to provide capital to good companies that perhaps need more runway because an initial public offering or other exit has been delayed. “We’re starting to see an increasing number of situations around the world where our capital can be very helpful to these borrowers,” Reynolds says. The pace of private credit investment The pace of private credit investment picked up last year. Goldman Sachs Asset Management has $130 billion in private credit assets under management, spread among more than 600 positions, making it one of the world’s largest private credit managers. The global private credit platform invested more than two times what it did in 2023, according to Reynolds. This activity was helped by an increase in certain types of M&A activity, including larger companies borrowing to make smaller bolt-on acquisitions. The strong pace of investment continued through the first quarter, Reynolds says.