Goldman Sachs believes a confluence in factors indicates that global equities have yet to recover from the current bear market.
“The bear market is not over, in our view,” strategists including Peter Oppenheimer and Sharon Bell wrote. “The conditions that are typically consistent with an equity trough have not yet been reached. We would expect lower valuations (consistent with recessionary outcomes), a trough in the momentum of growth deterioration, and a peak in interest rates before a sustained recovery begins.”
Before any sustained stock-market recovery can happen, which would bring an end to the current bear market, a peak in interest rates and lower valuations reflecting recession are necessary, Oppenheimer and Bell explained.
Typically, elevated interest rates act as a headwind for the stock market. Companies tend to invest less in growth since borrowing costs are higher.
The investment bank pointed to the rapid acceleration of interest rates as particularly worrisome.
“In our view, the speed of the rise in interest rates (rather than their absolute level) has the potential to do more damage as investors are likely to increasingly focus on growth and earnings weakness,” the analysts warned.
Alluding to the aggressive pace of interest rate hikes this year, the New York City-based investment bank stated that suppressed growth and earnings would result in a continuation of the bear market into next year. The analysts expect the S&P 500 index – considered a proxy for the broader equity market – to be roughly 4,000 points by the end of the year, up just 0.9% from Friday’s close.
In other words, they expect the market to barely move from its current level.
The gloomy outlook comes after a market rally that followed news of inflation slowing to 7.7% annually in October, the slowest pace since January. With inflation lower than economists had expected, the market reacted positively, hoping the Fed might ease up rate tightening moving forward. After all, it’s high inflation that is driving central bank tightening.
Goldman, however, does not think the Fed is finished hiking rates. Its analysts noted that the rebound was “not the first we have seen in this bear market.”
In light of the bear market continuing, Goldman recommended focusing on quality companies with strong balance sheets and stable margins, as well as those with deep value, such as energy and resource stocks, where valuation risks remain limited.
