Wall Street: a Goldman report worries investors

Although Wall Street has fallen from the highs of late last March, the recent recovery seems to encourage that hope for more gains is eternal for investors. Almost two thirds of the more than 400 respondents by the Bloomberg agency They bet on corporate results to boost the S&P 500 index. This is the highest level of earnings confidence since it was first asked in October 2022.

But some are already raising concerns about this overconfidence in the presentation of business results, which may be a risk on the horizon for stocks. The warning comes from the Goldman Sachs strategistsDominic Wilson and Kamakshya Trivedi, who talk about a “paradise postponed” and the short-term risks that are emerging for stocks, although they assure that it is not fatal yet.

For much of the year, these strategists have been quite optimistic about the effect that any Fed interest rate cut this year would have on stocks, Barbara Kollmeyer recalled at MarketWatch. Now Wilson and Trivedi wrote in a report “Global Market Views” that there could be “a good opportunity to push long positions in stocks once the interest rate repricing is complete, particularly if the Fed’s easing bias remains firm.”

They explained that they were hopeful about the impact of eliminating interest rate cuts on stock markets and believed that a higher inflation was the key risk to a long-term view of the stock. “This is because we have seen upward pressure on rates driven primarily by improving growth prospects; and because, in the case of stocks, we believe that the exact profile of easing is less important than the fact that the Fed is willing to cut if growth falters,” the Goldman people said.

Markets worried about inflation and “political shock”

Now that the Fed appears to have adopted a more aggressive policy stance, initial real yields on US Treasuries have risen and longer-dated pricing in the rates market appears to be “reaching an improvement in growth that has already been discounted in other places,” they maintain. Therefore, the market is experiencing a “political shock” now more than before, they added, with nominal growth still strong and earnings that should benefit from it.

Since the market is more concerned about inflation and any “policy shock”, The path to relief would require improvements in the outlook for monetary policy and solutions to geopolitical issues.they maintain, and in that framework a “good opportunity” to boost the bullish case for stocks will come once a reset in interest rates has been completed, especially if the Fed sticks to its easing trend.

So on the one hand dangerous inflation data would pose a central risk to a long-term view on stocks, and recent changes, such as persistent inflation pressures, raise the possibility that the Fed will not make cuts this year, which represents the first real challenge for stock markets in almost six months.

However, the catalysts for that change “are less clear and it is more difficult than before to manage a long position through options,” they noted, warning that there could be “more turmoil” ahead without a larger discount.

As for where to invest, Goldman offers this advice: “Greater likelihood of monetary easing coming later and more slowly is likely to favor high-quality parts of the market and hurt small capswhile the increased prospect of rate cuts outside the United States means that non-US (currency-hedged) equity markets may face a friendlier growth/inflation mix in the near term.”

Despite everything, for Henry Allen, Deutsche Bank strategist, there is no need to press the panic buttons even if the S&P 500 had not broken a streak of six consecutive losses last Monday. His data analysis shows that the average performance of the index after 6 consecutive declines translated into further gains over the next 3 months and 6 months. Since 2000, there have been 17 previous occasions when the S&P 500 went on a six-game losing streak, Allen maintains.