By Abhishek Vishnoi
(Bloomberg) — Goldman Sachs Group Inc. strategists said conditions for a trough in US equities are not visible yet as the asset class doesn’t fully reflect the latest rise in real yields and odds of a recession.
“US equity valuations do not yet offer a historically large premium to the real returns on offer from bonds and cash,” strategists including Kamakshya Trivedi wrote in a note dated Oct. 25. There can be “significant downside if a proper recession occurs or geopolitical risks in Ukraine or elsewhere intensify,” the note said.
___STEADY_PAYWALL___None of the US assets tracked by Goldman are fully pricing in a recession, with equities factoring in the lowest odds of a “severe hawkish scenario,” the strategists wrote. Their views differ from those of peers at Citigroup Inc. and JPMorgan Chase & Co., who said the stumble in markets implies that a recession is getting priced in.
In case of a severe economic downturn, the Goldman team said it expects the S&P 500 Index to drop to 2,888, implying 25% fall from Tuesday’s close.
Goldman’s caution comes at time when markets are making yet another attempt to find a floor. The S&P 500 Index has risen 8% since Oct. 12, when it closed at lowest since November 2020. Traders are turning somewhat bullish on Treasuries as they hedge for lower yields, build up long positions in portfolios and pare bets on aggressive Federal Reserve rate hikes.
A Bloomberg survey of mainly Wall Street economists puts the probability of a recession in the coming year at 60%, up from 50% a month earlier. Bloomberg economists including Eliza Winger are more bearish, setting the chance of recession at 100% in the next 12 months.
US Federal Reserve monetary tightening to curb inflation has pushed advanced economies closer to contractions, with the S&P 500 dropping 19% so far this year. Meanwhile, 10-year Treasury yields have climbed by more than 250 basis points over the same period.
Equities and credit will be especially vulnerable if a recession is coming, Trivedi and her colleagues wrote. Those with a longer investment horizon would do better to increase exposure in assets including European investment-grade debt and perhaps mortgages at current juncture, they said.
–With assistance from Edward Bolingbroke.
