Goldman Sachs strategist Peter Oppenheimer has reflected on the recent run-up in US stocks following a period of strong underperformance.
The strategist says that the rebound that we have seen is more rational than it might appear at first glance. He adds that many investors seemed to have missed out on this rally, which left them somewhat puzzled.
Oppenheimer lists 7 reasons why stocks are trading higher in recent days.
- Real interest rates remain deeply negative and equities provide a real yield;
- Equities are a real asset as they make a claim on nominal GDP;
- Private sector balance sheets are strong;
- Credit markets have been relatively stable;
- Fiscal spending/CAPEX are increasing;
- Valuations have fallen to below long-run averages; and
- Positioning had been heavily reduced, raising the asymmetry on risk assets.
Still, the strategist sees little near-term upside for equities given that GS year-end price target for the S&P 500 is 4700.
While equities should provide a hedge against inflation over the medium term, and should outperform bonds, there remain risks to the downside and more volatility, particularly related to growth risks, Oppenheimer wrote in a client note.
He continues to see a fat & flat market where returns are lower than in the post-financial crisis era. Goldman Sachs assigns a 25-30% risk of recession in the US over the next year.
In the short term, Q2 macro data and the upcoming earning season will be particularly important data points for investors... Under a recession scenario, the S&P 500 could fall to 3,600, or 22% below today's level. Client conversations reveal a notable lack of conviction or enthusiasm for US equities at current valuation levels (P/E of 21x our 2022 EPS forecast of $221) given the slowing economy and rising rate environment. We would see more downside risks in many other markets, the strategist concluded.
By Senad Karaahmetovic