MW The era of diversification has begun. Goldman says it has further to run.

By Jules Rimmer

'Diversify to amplify' is the call from Goldman strategists

When Goldman Sachs held strategy conferences in January of this year, surveys found that investors were predicting that U.S. equities would outperform, tech NYTECH would be the best sector and the dollar DXY would be the strongest currency. Fast forward as we approach the end of the first half of the year and Goldman's global strategy team, led by Peter Oppenheimer, is saying U.S. assets are no longer the only game in town and recommending investors diversify to achieve returns.

Goldman first suggested this "diversify to amplify" approach back in October 2024, when valuation spreads between the winners and losers of the 15 years following the global financial crisis of 2008-09 hit record highs. So did stock concentration, especially among the megacap tech names.

Oppenheimer's team acknowledged that valuation extremes can persist for extended periods - at least until "the underlying fundamentals in prospective relative growth are perceived to turn." They explained the extraordinary outperformance and the buildup in valuation premium as reflective of the superior fundamental profit growth resulting from the U.S., with a more proactive set of policy responses, bouncing back from the crisis faster than the rest of the world.

Deterred by the sovereign debt crisis in Europe and the decline in Chinese exports, international investors began to buy ever-larger amounts of faster-growing, better-performing U.S. assets. For their part, U.S. investors clearly had scant incentive to diversify. This combination created a virtuous cycle, compounded over a long period to establish an enormous valuation premium.

Since the start of 2025, though, a more resilient Chinese economy and a major change in German fiscal policy with the release of the "debt brake" began to attract investors to cheaper markets overseas. The burgeoning U.S. deficit and U.S. policy uncertainty in the areas of trade, foreign affairs and fiscal responsibility raised the risk premium on the dollar. The dollar's 10% depreciation this year means foreign exchange has become a major driver of multi-asset portfolio risk.

Goldman's forex strategists anticipate further downward adjustment for the dollar as the net upshot of tariff increases, eating into the corporate profits and the real incomes of U.S. households that drove dollar strength in the first place. Moreover, as the dollar is called into question, rates and interest costs are mounting, placing further strain on the U.S. budget.

Enthusiasm for U.S. exceptionalism peaked around November 2023 with the launch of ChatGPT, but since then the relative gap in earnings-per-share growth and return on equity has started to moderate.

Goldman notes that there have been tentative signs of investors broadening their geographical and sectoral exposure but that the concentration risk remains elevated in global portfolios. A normalization of interest rates across the world seems to have lessened the growth-versus-value bifurcation. Consequently, classic value sectors like European banks have started to perform strongly alongside classic growth stocks like the group of U.S. megacap tech stocks known as the Magnificent Seven MAGS. In the rest of the world, small caps and midcaps have started to outperform. The recommendation, then, according to Goldman, is that investors ought not to extrapolate trends that have been in place since the global financial crisis indefinitely. Things are changing.

-Jules Rimmer

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June 25, 2025 10:19 ET (14:19 GMT)

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