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Goldman sees limited upside and downside risk for stocks amid rising yields

Published 30/05/2024, 14:02
© Pavlo Gonchar / SOPA Images/Sipa via Reuters Connect

The robust rally in stocks this year is likely to lose momentum as a rise in bond yields coincides with higher valuations, a Goldman Sachs (NYSE:GS) strategist told Bloomberg TV.

“Bond yields are going up, and that’s restricting the upside from here,” he said, adding that US earnings growth excluding the technology behemoths was also moderate. “We think equities are going to be pretty much sideways for the next few months.”

Goldman’s expert, who has previously noted that equity markets outside the US are more attractive, pointed out that the correlation between stocks and Treasuries is expected to increase, as yields have reached a level that “is likely going to weigh on all asset classes.”

The S&P 500 is experiencing its first weekly decline since mid-April as the 10-year Treasury yield rises amid sluggish bond auctions and uncertainty surrounding the timing of interest-rate cuts by the Federal Reserve. When asked about whether the rise in yields was punitive for stocks, the strategist said: “That’s absolutely right.”

“The impact on stocks is a function of the level and the speed” of the surge in yields, he noted. “The faster any rise in yields, the bigger the impact on equities. And given the valuation of equities, it’s going to be a speed bump.”

The strategist reaffirmed his views that investors should diversify their geographical and sectoral exposure. He believes investors should opt for a barbell approach that includes quality defensive growth stocks such as Big Tech and “deep value” stocks.

“Diversification is the opportunity that investors have in a flatter market environment,” he said.

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