Goldman Sachs Predicts 2025: The Year of Income Generation

Goldman Sachs Asset Management is forecasting a shift in investment strategies for 2025, predicting it will be the “year of generating income.” With equity upside expected to be less pronounced, the firm advises investors to incorporate income-producing assets into their portfolios to achieve comparable returns to those seen in the past year. This strategy, according to Ashish Shah, Goldman’s chief investment officer of public investing, will focus on mitigating volatility while still capturing some equity upside and generating consistent income. However, achieving this will require a creative approach, as traditional high-yield options are becoming less readily available due to factors such as tighter credit spreads and the Federal Reserve’s rate adjustments.

Key Takeaways: Navigating the Shift to Income-Focused Investing

• Equity upside is expected to be limited in 2025, pushing investors to prioritize income generation.
• Traditional high-yield avenues are shrinking, forcing a need for creative income-generating strategies.
• Three key income-generating strategies are highlighted: Options strategies (buy-write), high-yield municipal bonds, and a balanced portfolio of dividend stocks and high-yielding bonds.
• Diversification is crucial; a mix of strategies rather than focusing solely on one is recommended.
• Understanding risk is paramount, particularly when considering high-yield municipal bonds and securitized products like CLOs and CMBS.

The Evolving Investment Landscape: Why Income Matters in 2025

Goldman Sachs’ prediction reflects a broader shift in the investment landscape. The firm anticipates that the exceptional returns seen in equities in recent years will be less easily replicated in 2025. “Valuations are high enough that if you can figure out how to … reduce the volatility of your assets, generate income, and still capture some of that equity upside, that’s going to be what works in 2025,” Shah stated. This underscores the need for investors to adapt their strategies and focus on a more balanced approach that integrates income generation alongside capital appreciation. The days of relying solely on high returns from easily accessible high-yield instruments may be over for the time being.

The Diminishing Appeal of “Easy” Income

Shah highlights the challenges of finding “easy” income in 2025. High yields in cash equivalent accounts and Treasury bills, which have been attractive recently, are likely to decline as the Federal Reserve continues its rate-cutting cycle. As an example, he points to the seven-day yield on the Crane 100 list, which has already decreased from a high of 5.20% at the end of last year to 4.46% currently. This shrinking pool of high-yield “easy” income necessitates a more proactive and diversified approach to income generation for investors.

Three Key Strategies for Income Generation in 2025

Goldman Sachs outlines three main strategies for investors seeking to enhance income generation in 2025’s changing market conditions.

1. Options Strategies: Buy-Write for Capital Appreciation and Income

One recommended approach involves employing options strategies, specifically the “buy-write” strategy. This involves purchasing a stock and simultaneously selling call options on those shares. This strategy allows investors to benefit from potential capital appreciation of the underlying stock while also generating income from the options premiums. This provides a dual source of return and Shah emphasizes that some exchange-traded funds (ETFs) manage this strategy, such as the Goldman Sachs S&P 500 Core Premium Income ETF (GPIX) and the Goldman Sachs Nasdaq-100 Core Premium Income ETF (GPIQ).

2. High-Yield Municipal Bonds: Tax-Advantaged Income Potential

Another attractive avenue for income generation is identified as investing in high-yield municipal bonds. These bonds offer a compelling proposition for high-income investors due to their tax-advantaged status. The income generated from these bonds is exempt from federal taxes, and also state taxes if the bond issuer and the investor reside in the same state. “Municipal high yield is a good way of generating income that can compete with your appreciation,” Shah explained. He further notes that attractive yields can be found in these bonds, particularly when considering those further out on the yield curve. The ongoing need for infrastructure funding projects also provides an underlying support for this asset class.

3. Dividend Stocks and High-Yield Bonds: A Balanced Approach

The third suggested approach involves creating a balanced portfolio comprising dividend-paying stocks and high-yield bonds. This strategy focuses on companies generating robust cash flows and consistently paying out dividends, rather than relying solely on pure capital appreciation or high price-to-earnings ratio stocks. The fixed-income component involves high-yielding securities, which inherently carry higher risk than investment-grade bonds. Shah highlights that a portfolio constructed this way – prioritizing companies with bond-like characteristics and bonds behaving more like stocks – delivers higher income potential.

Securitized Products: Mitigating Risk While Boosting Income

Shah specifically underscores potential within securitized products among fixed income assets. He points out that securitization offers some protection against substantial losses from defaults – potentially affecting only small fractions of a portfolio. Nonetheless, the income generated from such investments can still be attractive. He specifically suggests collateralized loan obligations (CLOs), which involve pooling floating-rate loans to businesses (sometimes including non-investment-grade borrowers), and commercial mortgage-backed securities (CMBS), a potential beneficiary of reduced lending activity by banks. “Lending to commercial properties is an area where you are still benefiting from banks pulling back” on such loans, he explained; noting that “fundamentals in those spaces are generally bottoming, so you can do a better job of understanding the downside risk that you are bearing of the income you are generating.“

The Power of Diversification: A Mixed Approach to Maximize Returns

Shah strongly emphasizes the importance of diversification, urging investors not to focus solely on one of these income-generating strategies. He advises a multi-faceted approach. “We believe that rather than pick one of those, you can generate good income by finding the best opportunities across those three markets — a mix of buy-write when it is timely, dividend-paying companies and high-yielding bonds,” he stated. By combining these income-generating strategies, investors can construct a portfolio that balances risk and return, maximizing the income potential while appropriately managing any potential downside risks, which is crucial given the changing market outlook.