Goldman Sachs The Markets

Bonds or Stocks: The 2025 Income Play

Ashish Shah, Global Co-head, Chief Investment Officer,
Public Investing, Goldman Sachs
Chris Hussey, Host, Goldman Sachs Research
Date of recording: March 20, 2025

Chris Hussey: Signs of a slowdown abound. And stocks

swoon. Is it time to lean into bonds? This is The Markets.
I’m Chris Hussey and today is Thursday, March 20 th. And
I’m joined by Ashish Shah, global co-head and chief
investment officer of public investing within Goldman
Sachs Asset Management. Ashish, thanks for joining us.

Ashish Shah: Thanks so much for having me.

Chris Hussey: All right. Let’s get into the Fed because
we had the Fed statement yesterday afternoon. Yields on
ten-year treasuries are down while stocks, at least on
Wednesday, were up. What do you make of it? Did Powell
just reintroduce the Fed put?

Ashish Shah: This was the dovish hold. You had the
Fed come out and essentially revise up its inflation

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forecast. Revise down its growth forecast. In aggregate,
basically nominal GDP is going to stay the same.

But then, in the presser, it was the emphasis of how the

Fed is thinking about things. This inflation that’s going to
rise is a function of tariffs being imposed. That’s going to be
transitional. And the Fed, you know, has a lot of
uncertainty it has to deal with. It wants to maintain its
credibility when it comes to fighting inflation. But also
recognizes that growth is decelerating here.

When your starting point of having policy rates that are

essentially serving as a break to the economy and trying to
slow the economy down modestly, you can simply remind
people that, hey, it’s really easy for us to take the foot off
the brake. And so, what you heard from Powell was, you
know, Fed stands ready to do what’s necessary if the data
starts to show that we’re slowing a lot faster than we
expected.

Chris Hussey: Yeah, I think he did use that term,

transitory. Last time he used the term transitory, the
markets didn’t buy it so much. This time maybe a little bit
more. Peel back the onion of that lower growth forecast

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they have as well because the economy is a thing that has
people concerned about right now. Are we seeing economic
slowdown? Or is this just something that people think we
might see?

Ashish Shah: When we hit December and the

employment number, it looked like we were getting a
reacceleration of employment. And the seasonals really
generally point to a January/February that we would have
expected to see that seasonal turnaround continue, or that
strength continue. That’s not what we’ve seen in the high
frequency data.

And I think further concerning is that we’ve seen the

consumer start to behave in a way that’s very familiar to
us, which is when prices go up on something, they slow
down their spending in another place because their
incomes aren’t growing nearly at the same pace. And they
aren’t nearly as confident as they had been.

And so, I think from a growth perspective, the consumer is

definitely weighing on the near-term concerns. And further
out though, you have a lot of change going on between
tariffs, between changes in policy. Some of those changes

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might be positive. Some of them are leading to a lot of
uncertainty. And so, I don’t think any of us knows how
that’s going to translate directly into the economy.

But we know when you’re in an environment where there is

uncertainty, that people say, hey, I’m not going to make the
big bet. And so, I think there is that possibility that you
start to decelerate. But again, the Fed just reminded you
that they’re there to cushion and they can restart parts of
the economy that they’ve been holding back because the
economy’s been growing too fast.

Chris Hussey: Let’s talk a little bit about bonds because

as you pointed out, the Fed has room to cut. Rates have
room to go down. Is 2025 shaping up to be the year of
income?

Ashish Shah: We’ve definitely thought that 2025 was

going to be the year of income. Bonds are one fantastic
source of income. But I think because of the duration
moves we had and because of the inflation concerns that
we’ve just gone through, people are afraid of bonds again.
But I think the reason we’re calling it the year of income,
not the year of bonds, is because there are a lot of different

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sources of income.

And when you think about the market pricing for certain
parts of the equity market, we knew that the upside was
going to be more limited. That so much was priced in terms
of good news that you were going to have more kind of
upside limit. And that by generating income by looking for
dividend paying stocks, by looking at doing buy right
strategies, and by looking at credit markets and fixed
income markets, that these were all going to be good
sources of income.

The fantastic thing about income is if you generate income,

it gives you money to reinvest in whatever the cheapest
asset is. And frankly, that’s one of the reasons why you’re
seeing this stabilization in the market here is you’re seeing
kind of people reallocate out of their bonds into the stocks
because the bonds have gone up a lot in the course of the
last quarter. And stocks have sold off. And so, that
rebalancing feature lends a lot of returns over time. You
don’t need negative correlation. You just need income.
Bonds have income today.

I’d say the other thing that’s really absolutely critical here

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to understand is that you don’t simply have to have
duration risk, right? When you think about relative growth,
you have a lot of different growth stories. You have Japan
where they’re still hiking because inflation is high, and
rates are low. You have now the US, we’re reopening the
potential for rate cuts. And you have a reacceleration going
on in Europe. And so, relative value trades, both in curve
as well as across different markets, represent
opportunities. Those have been some of the highest sharp
ratio trades available. And that’s why we like saying let’s be
dynamic in bonds. Don’t just anchor to one thing. But look
at the full opportunity set.

Chris Hussey: So, yeah, there are a lot of opportunity

there from Japan to writing a covered call, even just buying
bonds. What’s the trade though? What’s your favorite here?

Ashish Shah: Yeah, so given what’s happened, given

where we’re at right now, there are one or two things I
would be considering doing here. First of all, part of the
reason you’re seeing these big daily moves in equity
markets is because what we’ve seen is retail likes to sell
options to generate income. And when you move and shift
levels as quickly as we have, the street runs out of gamma.

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And so, they stop being a stabilizing force within the equity
market.

And so, we think that you’ve restarted this gamma selling.

You’ve restarted this kind of call selling against positions.
And so, we like that trade. We think it’s going to represent
good opportunity within a range to restabilize the market
as a good way of generating income.

And then the second thing is, you know, you’ve had a big
drawdown, obviously, that’s been driven by Mag 7. We can
have an honest discussion around whether that reverses or
if it continues. I’ll tell you where the Mag 7 isn’t, it’s not in
small-caps. You had a long period of underperformance in
small-caps. You had some optimism develop around things
like deal, volume, etcetera, as we were going into the year.
That optimism’s been taken out. And now, we’re seeing
clients look a lot more closely at small-caps, both the value
and the growth side, and saying, hey, you know, sentiment
turned the other way as positioning turned another way.
And just a small reallocation back into small-caps, which
had been left for dead in some ways, could move a lot of
market cap. And by the way, small-caps are much more
exposed to lower rates in a positive way, right, because a

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lot of them have this debt. And a lot of them benefit from
lower financing costs. So, small-caps are a really
interesting trade here depending on how you’ve positioned
your broader equity portfolio.

Chris Hussey: That is an interesting trade. We haven’t

heard that in a while too. So, small-caps as an option here.
Thanks so much, Ashish, for joining us.

Ashish Shah: Thanks for having me.

Chris Hussey: That does it for this week's episode of

The Markets. I'm Chris Hussey, thanks for listening. And if
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