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As the easy-money era of the pandemic closes, the market will begin to reward stock-pickers more amid the return to a "normal" cycle, Goldman Sachs said.
Meanwhile, higher inflation and interest rates will make the post-pandemic landscape less generous overall, with aggregate index returns coming in lower, according to a note dated February 10.
"We are back to a more 'normal' cycle where we expect investors to be rewarded for making sector and stock decisions related to potential growth relative to what is priced," wrote analysts led by Peter Oppenheimer, Goldman's chief global equity strategist.
Recent years have seen a surge in passive investing as hedge funds and other active investors have lagged the S&P 500's gains. As a result, investors have poured money into index-tracking ETFs.
Over the last two years, Goldman said, stocks have largely moved in lockstep as they rebounded from the March 2020 slump. Valuations have surged to new highs, especially among growth-oriented technology stocks.
But that trend is coming to an end, analysts predicted, saying "the ability to reflect that growth in just one market, factor or particular sector is over."
Slower economic growth going forward will put a premium on being more discriminating instead of relying on exposure to the broader market.
Because global equity market capitalization has grown in proportion to the global GDP, the bank said this could imply lower returns over the longer term.
Additionally, rising interest rates are set to push valuations lower and will contribute to a rotation from growth stocks into value stocks.
As the Fed begins to implement more hawkish monetary policy, the bank expects investors to see lower overall returns and less dominance among technology stocks.
